Stock market in “bubble”, Boston Fed chief suggests taper soon

Markets were mixed on Monday.

The S&P 500 fell 0.1 percent, the STOXX Europe 600 rose 0.2 percent and the Shanghai Composite rose 1.1 percent.

Oil prices fell. West Texas Intermediate crude fell 2.6 percent and Brent fell 2.4 percent.

“The biggest challenge for oil markets remains the uncertainty around COVID as the ‘delta variant’ has made for the highest daily case counts since early 2021,” Bank of America said.

“The surge in cases continues to pressure the cyclical parts of the stock market the most including cyclical sectors like energy and industrials and small cap stocks,” said Jim Paulsen, chief investment strategist at the Leuthold Group.

Meanwhile, Richard Bernstein, the CEO and CIO of Richard Bernstein Advisors, said on CNBC on Monday: “We are right in maybe the biggest bubble of my career.”

“The Fed has so distorted the long-end of the curve that we are seeing a very natural reaction among long-duration assets which is then taking on a life of its own,” he said.

Bernstein added that a rapid drying-up of liquidity is “unlikely” so “the probability of a major bear market is probably much lower than people might think”.

Still, the view that the Fed should begin withdrawing liquidity soon may be gaining ground.

Eric Rosengren, the president of the Federal Reserve Bank of Boston, said on Monday that the central bank should announce in September that it will begin reducing its purchases of Treasury and mortgage bonds.

“I don’t think asset purchases are having the desired impact on really promoting employment,” he explained.