MercoPress. South Atlantic News Agency

US Federal Reserve warns about stock prices and high corporate debt loads

The Fed noted the large appetite for risk has kept stock prices relative to expected earnings above their average of the last 30 years, although the situation has eased

The US central bank warned on Monday of persistent risks to the financial system posed by elevated stock prices and historically high corporate debt loads as well as the impact of President Donald Trump's trade wars.

But major banks and insurance companies appear healthy and there is a low risk they would face a crash crunch during a run by panicked investors, the Federal Reserve said in its latest report on financial stability.

The Fed said conditions had changed little since the assessment made in November, noting the large appetite for risk has kept stock prices relative to expected earnings above their average of the last 30 years, although the situation has eased somewhat.

After a rout in December, the S&P 500, a broad market index comprising the largest US corporations, has now risen more than 15% since the start of the year, touching new record heights.

Corporate debt also has grown faster than the economy for the past decade - with the fastest growth “concentrated among the riskiest firms,” the Fed report said.

Meanwhile, outreach to market players and experts showed persistent worries about trade and slowing global growth, particularly in China and Europe - with a possible “no-deal” Brexit and Italian fiscal woes among the key concerns.

“Trade tensions were the preeminent risk for respondents in the first quarter of 2019,” the report said, adding that, while the US-China trade war was major concern, Fed contacts also worried about Trump's threat to slap tariffs on auto imports.

But high levels of indebtedness remain a concern, as well as the quality of the lending.

“The risks associated with leveraged loans have also intensified, as a greater proportion are to borrowers with lower credit ratings and already high levels of debt,” the report said.

“In addition, loan agreements contain fewer financial maintenance covenants, which effectively reduce the incentive to monitor obligors and the ability to influence their behavior.”

On the other hand, worries about spillovers from emerging markets other than China - such as Argentina and Venezuela - had lessened since the prior report in November.