Professor Johnson has been researching the association between capital market returns and Federal Reserve policy for over 20 years and has published many articles on that topic.
The financial markets closely follow the actions of the Federal Reserve and incoming chair Janet Yellen’s recent Congressional testimony is no exception. The markets rallied on the news that Yellen indicated no major changes in Fed policy, signaling that bond buying by the Fed would continue as long as it is helping the economy recover.
One of the truisms in investments is that markets dislike uncertainty and her testimony did not signal a change in course by the Fed, and the markets were comforted by Yellen’s words.
Johnson notes that stock valuations have certainly risen dramatically in the past year. “The market PE (on a trailing 12 month earnings basis) on the S&P 500 is around 19 having risen from 16 a year ago. Some analysts have suggested that the valuations are simply being inflated by the Fed’s financial easing and that a bubble in asset prices is being created. While these valuations are on the high side historically, they are not unreasonably high.”
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