Strategist Ed Yardeni says stocks may be in the 'mother of all melt ups' but not without risks

Published Mon, Jul 6 202011:14 AM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

(This story is for CNBC Pro subscribers only.) Veteran strategist Edward Yardeni told CNBC on Monday that the Federal Reserve 's unprecedented policy response to the coronavirus pandemic is powering stocks higher but not without risks. "The Fed has just poured in so much liquidity into the market that there's a potential for something that might look like 1999 all over again," the Yardeni Research president said on "Squawk on the Street," a reference to the soaring equity valuations that preceded the 2000 dot-com bubble burst. Yardeni said he believes investors need to be thinking about valuations "very seriously," following U.S. stock indexes' robust rise from coronavirus-driven lows in late March. Entering Monday's session, the S & P 500 was more than 40% above its March 23 bottom. But determining a forward price-to-earnings ratio for stocks under these market conditions is not an easy task, Yardeni acknowledged. "What should the forward P/E of the S & P 500 be when the Fed funds rate is zero, when the 10-year Treasury bond yield is under 1% and the Fed is leaving no asset behind?" Yardeni said. "They're not buying equities directly, but they don't have to. Just by keeping interest rates near zero, they're forcing a lot of people to re-balance into equities." Many investors used to agree that a forward P/E around 15 was "fair value," but now the broad index now trades around 22 times forward earnings , Yardeni said. There is potential for it to "go still higher," he contended. "The question is, what's fair value? And I don't even know that concept makes sense in a market that's totally been co-opted by the central banks," Yardeni said. "So I think we could be looking at a higher P/E and that would certainly be consistent with what I call, 'the mother of all melt-ups,' which I think is the possibility here." Yardeni said the path forward for investors depends on their current portfolio construction. At this point, for those who are in equities, "I'd stay with it," he said. "If you're a long-term investor, I'd be rooting for the market to consolidate but it may not be that considerate," he said. "It could be a continuation of a melt-up and along the way, I may very well recommend taking some profits. But we'll see. It's still early in the game." Yardeni said that being a bond investor right now is a "disaster" because the Fed has indicated it will likely continue its accommodative interest rate policy through 2022 . "If it was a matter of six months and then the Fed's out of the game, that would be wonderful," he said. "Whether you like it or not, if you're a investor, you really have to seriously consider re-balancing, moving out of bonds and into stocks, and a lot of people aren't necessarily going to feel very comfortable with that with the market already having run up so much."

(This story is for CNBC Pro subscribers only.)

Veteran strategist Edward Yardeni told CNBC on Monday that the Federal Reserve's unprecedented policy response to the coronavirus pandemic is powering stocks higher but not without risks.

"The Fed has just poured in so much liquidity into the market that there's a potential for something that might look like 1999 all over again," the Yardeni Research president said on "Squawk on the Street," a reference to the soaring equity valuations that preceded the 2000 dot-com bubble burst.