Saturday, September 18 2021

The strategists of Bank of America Corp. have warned that the “extreme rally” on Wall Street that has pushed stocks to record highs, fueled by a strong stimulus in US policy, is forming an asset price bubble.

“DC’s political bubble is fueling Wall St’s asset price bubble,” strategists led by Michael Hartnett wrote in a note Friday. “When those who want to stay rich start acting like those who want to get rich, it suggests a late stage speculative move. “

Strategists predict a market correction and positioning to peak in the first quarter, with the BofA Bull & Bear indicator approaching a “sell signal”.

Soaring market prices as investors boost inflation-linked transactions will cause “core inflation” to rise, risking a fit of temper, tighter financial conditions and volatility events, strategists have warned. . They highlighted past bubbles, notably that of the dot-com era and the real estate market in 2007-2008.

Risky assets rallying to vaccine prospects are getting a new boost this year thanks to bets that a victory for U.S. Democrats in the Senate will spur further fiscal stimulus, adding to the Federal Reserve’s largesse. The S&P 500 Index has jumped more than 70% since its low last March, while the Nasdaq 100 has nearly doubled and Bitcoin has climbed above US $ 30,000.

Central bank balance sheets swelled in 2020, reaching a record size for the Fed and the European Central Bank. BofA expects the Fed’s balance sheet to reach 42% of U.S. gross domestic product this year, while predicting that the country’s budget deficit will reach 33% of GDP.

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