4 Secure Stocks To Combat Fed's Overvaluation Fears

Stocks moved lower on Monday after some members of the Federal Reserve opined that equity markets were significantly overvalued. Minutes from the central bank’s March meeting also affected investor sentiment because it revealed that the Fed was considering reducing the size of its balance sheet.

But what caught the attention of investors and market watchers alike was the concern expressed on the valuation front. Meanwhile, the “Trump Rally” has likely lost steam following the new administration’s abortive attempt to push through a new healthcare bill. This failure has also called into question Trump’s ability to push through his other policy initiatives.

Since both these factors have dented investor confidence, picking value stocks with low beta looks like a smart option at this point. Beta measures the tendency of a stock's returns to respond to market swings. Low correlation stocks provide protection during turbulent times as they are less prone to day-to-day fluctuations

Fed Minutes Raise Valuation Concerns

Among other matters, March’s Fed Minutes highlighted members’ concerns that stock prices were substantially overvalued. According to the minutes, some central bank members were of the opinion that equity prices were high compared to widely use valuation metrics. For instance, certain gauges, such as price to earnings ratios have soared above their historical averages.

This is not the first time that the central bank, and in particular, the Fed Chair has raised an alarm over stock valuations. In Jun 2016, Janet Yellen told a Senate panel that valuations were a matter of concern because of investor pessimism about corporate earnings. Earlier, in May 2015, Yellen had highlighted similar fears when the Fed was considering its first rate hike in a decade. It is likely that such concerns have been flagged by the Fed Chair this time as well.

Historical Validity, Trump’s Policy Initiatives

But how far are the Fed’s concerns about exorbitant stock prices valid? Traders were quick to discount such fears, much in the same way that they did when former Fed Chair Alan Greenspan talked about the markets’ “irrational exuberance” in Dec 1996, three years before the dotcom market hit its peak. A closer examination of Fed minutes from 1996 reveals that concerns about valuations have often been borne out by actual events, according to data analytics company Kensho.

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