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Fed Alerts of Potential Downside Risks Amid High Asset Valuations and Rising Global Trade Concerns
(New York = Yonhap News) -- On the 25th (local time), the U.S. Federal Reserve (Fed) issued a warning that, despite recent stock market adjustments, asset prices remain high, posing vulnerabilities to the financial market.
In its semiannual Financial Stability Report released on Wednesday, the Fed stated, "Despite the recent drop in equity prices, valuations remain high compared to market experts' projections for corporate earnings." This implies that while stock prices have recently declined, valuation metrics considering corporate performance indicate that prices are still historically high, thus suggesting potential downside risks.
As reported by The Wall Street Journal (WSJ), the S&P 500 index's 12-month forward price-to-earnings (P/E) ratio was 20.47 as of Wednesday. In comparison, JP Morgan Chase notes that the 30-year average forward P/E ratio for the S&P 500 index is 16.93, significantly lower than the current level.
Leverage and Liquidity Risks Continue, but Funding Markets Show Resilience
The Fed also pointed out ongoing concerns related to leverage and funding risks in financial markets. However, it mentioned that despite the increased volatility seen in early April, funding markets have shown resilience.
This financial stability report accounts for market conditions and data through April 11. The report also highlighted substantial unrealized losses in some banks’ bond portfolios, stressing their increased sensitivity to interest rate changes.
Earlier in 2023, the sharp rise in U.S. Treasury yields led to significant declines in the valuation of bond holdings, contributing to the collapse of Silicon Valley Bank (SVB), as per industry evaluations.
Growing Concerns Over Global Trade and Policy Uncertainties
Additionally, the Fed's survey of market participants, research institutions, and academics revealed rising concerns about global trade risks. Respondents cited uncertainties regarding policy directions and highlighted risks related to the sustainability of U.S. government debt levels.
The report clarified that most survey responses were collected before April 2, the date when reciprocal trade tariff announcements were made.
The Fed publishes its Financial Stability Report twice a year to assess potential risks and vulnerabilities in U.S. financial markets and to effectively gauge their stability.
