The stock market is in a bubble that's being fueled by U.S. policy on coronavirus stimulus, Bank of America economists warned in a note to clients.
“D.C.’s policy bubble is fueling Wall St’s asset price bubble,” the strategists, led by Michael Hartnett, wrote in a Friday note. “When those who want to stay rich start acting like those who want to get rich, it suggests a late-stage speculative blow-off."
The analysts are referring to the Federal Reserve's monetary policies and massive spending policies from Congress.
The Fed responded to the crisis by pumping nearly $2.9 trillion into the economy, and its balance sheet has expanded to more than $7.4 trillion, a record. Central bank policymakers also slashed the interest rate to near zero during an emergency meeting in March and launched crisis-era lending facilities to ensure that credit flows to households and businesses.
At the same time, Congress has approved nearly $4 trillion in spending intended to blunt the economic pain of the coronavirus pandemic, including sending two cash payments to most Americans, boosting unemployment benefits and establishing the Paycheck Protection Program, a grant program for small businesses.
As a result, BofA said it expects the Fed balance sheet to surge to 42% of US GDP this year, while it expects the budget deficit to hit 33% of GDP, BofA said.
The spending appears unlikely to slow anytime soon: President Biden has outlined a $1.9 trillion relief package that includes $20 billion to accelerate vaccine distribution, a $15-an-hour minimum wage increase, an extension of supplemental unemployment benefits through the end of September, a one-time $1,400 stimulus check, a temporary expansion of the Earned Income Tax Credit and Child Tax Credit and $350 billion in new funding for state and local governments.
Goldman Sachs also warned of an impending market correction in an analyst note last week.
"The market is rising on good news but choosing to largely ignore weaker data and rising infection rates," the analysts wrote. "Rapid fund flows and highly correlated risk assets make a correction in the near term increasingly likely."