Excessive risk-taking making stocks overvalued

12 April 2021 | Economics

Washington - Massive government aid has provided liquidity to support economies during the Covid-19 pandemic, but also caused stock prices to surge beyond their value, the IMF has cautioned.

The "unprecedented policy support may have unintended consequences," including "excessive risk-taking in markets," the International Monetary Fund said last week.

That has contributed to pushing stock values "meaningfully higher" than what would be expected given their fundamentals, the IMF said in its Global Financial Stability Report.

Stock prices worldwide, especially among tech companies, have surged throughout the pandemic, picking up speed in recent weeks to set successive new records as the global economy showed signs of a strong recovery from the downturn.

In the United States, the broad-based S&P 500 has jumped more than 50% in the past year, while the tech-rich Nasdaq gained more than 73%.

While the IMF offered a more upbeat growth outlook for the global economy, it stressed the need for continued government support to prevent lasting damage.

‘LEGACY OF VULNERABILITIES’

However, the IMF warned policymakers to "avoid a legacy of vulnerabilities" in the financial system, and to "tighten" oversight tools "to tackle pockets of elevated vulnerability."

And they cautioned that policies should avoid "a broad tightening of financial conditions" which could trigger a more "disorderly" reaction.

Markets have hit turbulence in the past several weeks as the prospects for a rapid US recovery raised concerns the Federal Reserve would have to raise interest rates more quickly than expected "potentially hurting growth prospects."

"For the moment, global rates remain low by historical standards at the speed of adjustment, and rates could generate unwelcome volatility in global financial markets," said Tobias Adrian, head of the IMF's Monetary and Capital Markets Department.

Despite those concerns, the report said: "Ongoing policy support remains essential until a sustainable and inclusive recovery takes hold to maintain the flow of credit to the economy and prevent the pandemic from posing a threat to the global financial system." – Nampa/AFP

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