- He said actions by the Fed, including purchasing corporate bonds, have prompted a move out of bonds into equities, causing the latter to be in "the mother of all melt-ups."
- The Fed announced last week it spent $428 million in its first round of corporate buying, as part of its $250 billion programme.
- Yardeni said the Fed's decision to keep interest rates at zero will also force price-to-earnings ratios on stocks to turn higher.
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Markets tanked in March, but strategist Ed Yardeni has shied away from calling it a market crash, and believes actions by the Fed are in fact causing stocks to explode into the "mother of all melt ups."
Yardeni, who is president of Yardeni Research, told CNBC in an interview Monday: "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."
He referred to soaring equity valuations that preceded the 2000 dot-com bubble burst.
Yardeni said: "Remember that Prince song about partying like it is 1999. The market certainly has that potential."
He shares the view that the Fed's quantitative easing programme has prompted a flight out of bonds and made equities more attractive.
"By March 23 the Fed came in and did QE forever saying they would [buy] treasury and mortgage back securities that were open-ended," he said.
"They started a programme which I call 'no assets left behind'," he said.
Yardeni believes the Fed's purchase of corporate bonds, including some of the "lowest investment grade bonds that have turned into junk" has generated "a tremendous pressure to balance out of bonds and into stocks."
The Fed announced in mid-June that it would begin purchases of up to $250 billion in corporate bonds. The program is known as the Secondary Market Corporate Credit Facility and is being operating by asset management behemoth BlackRock.
Read More: Bank of America identifies 3 indicators that could make or break the stock market this summer and warns they're all deteriorating fast Last week the Fed revealed it bought $428 million worth of corporate bonds in its first foray into company debt as part of its response to the coronavirus, snapping up debt in household names like Coca-Cola, AT&T, and Berkshire Hathaway in the process. "I think the bull market is still intact, I don't view the sell-off we had in February and March as a bear market," Yardeni said. Markets tanked on March 23 when countries had just starting placing their economies under lockdowns due to COVID-19. The S&P 500 had touched a low of 2237.40 on March 23. But Yardeni doesn't think it was a true sell-off and thinks "the tail end of this bull market" may end up "with a melt up." He thinks the US economy is more likely to face a "swoosh recovery" rather than a V-shaped one that market players are hoping for. Price-to-earnings ratios will go higher Yardeni said there is a potential for price-to-earnings (PE) ratios for stocks to increase, as by keeping interest rates near zero, the Fed is "forcing a lot of people to rebalance into equities." Yardeni said: "In older days before the great virus, we all agreed the normal fair value PE was something like 15, now we are at 22." Read More: GOLDMAN SACHS: Buy these 13 stocks that are poised to crush the market within the next 2 weeks as earnings season gets underway He added: "We could be looking at a higher PE and that would certainly be consistent with what I call the mother of all melt-ups which I think is a possibility over here." His final advice to investors is to wait for the market to consolidate. "At this point if you are in the equity market I would stay with it," he said. Yardeni added: "Along the way I may very well recommend that they use their profits, but we will see. It is still early in the game." NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence See Also: US economy smashes forecasts, adds 4.8 million jobs in June as unemployment declines to 11.1% US weekly jobless claims hit 1.4 million, more than economist forecasts A 22-year market vet explains why stocks are headed for a 'massive reset' as the economy struggles to recover from COVID-19 and outlines why that will put mega-cap tech companies in serious danger