Some investors may be tempted to buy amid the moderate dips in stock prices, but we lay out the rationale for a more nuanced approach.
By Lisa Shalett – The second half of February brought not just a market selloff, but also indications of a more serious potential shift in market outlook. Just two weeks after hitting a high of 3948 on Feb 16, the S&P 500, the benchmark index of the broader U.S. market, has fallen 3.5%, while the tech-and-growth-stock-heavy Nasdaq index is down about 6.4%. For some, that may seem like the kind of moderate dip that could be a buying opportunity, but we don’t believe that’s the case right now.
A close look at interest-rate dynamics suggests that fundamental market conditions may be changing. In the past two weeks, we’ve seen the benchmark 10-year Treasury yield surge as high as 1.6% from 1.3%—compared with its historic low of 0.5% last August. The recent surge may indicate a reassessment of the speed of the U.S. economic recovery and the likely Federal Reserve policy response.
Investor faith that interest rates would remain stable at very low levels has helped support sky-high price-to-earnings multiples this year. Growth stocks are often valued against the yield on a low-risk Treasury bond—the wider the spread, the larger premium that an investor is expected to pay for the added risk of growth. As rates move higher, stock prices often adjust to reflect that narrowing gap. That may be a big reason why tech stocks, in particular, got hit so hard last week.
Also, survey-based indicators from primary dealers and investors suggest that market participants believe that a tapering of the Fed’s bond-buying program will begin in the first quarter of 2022. For that timeline, the Fed would have to start signaling a shift later this year to avoid major market upset, similar to what we saw with the 2018 “taper tantrum.”
This shift in policy expectations has material implications for portfolio construction, suggesting not only shifts in sector and regional positioning, but fresh approaches to diversification, as rising rates produce potential headwinds for both stocks and bonds simultaneously.
Investors should consider adding economically cyclical sectors that can take advantage of global reflation. We also suggest maintaining positions in defensive sectors that would likely do well if the faster-growth, rising-rate scenario takes longer to materialize than indicators now suggest. more>
By Richard Vague – Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.
ITU – In a world where an 
By Andrew Clark -Some Dell laptops have an Intel processor inside, and some Betty Crocker brownie mixes use Hershey’s chocolate. The idea behind such co-branding is to generate synergies and marketing efficiencies. Does the strategy really work?
By Frank Partnoy – The reforms were well intentioned, but, as we’ll see, they haven’t kept the banks from falling back into old, bad habits. After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.
By Sally Goerner – Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.
By Lena Deros – The term “bankster” has become trendy recently due to the various financial problems governments and economies are facing. Problems arise and somehow get resolved, but only through financial ruses.
By John H. Cochrane – Public attention in the United States during the first phase of the COVID-19 crisis has been largely on the disease itself, the massive social and economic shock of the shutdown, and how we can orchestrate a safe reopening. But we also need to pay some attention to the financial side of the current situation, and the Federal Reserve’s immense reaction to it. Whatever one thinks of that reaction, it’s important to understand what the bank did, what beneficial and adverse consequences there are, and how our financial and economic system and policies might be set up better in the future.
By Marie-Paule Laurent, Olivier Plantefève, Maribel Tejada, and Frédéric van Weyenbergh – The COVID-19 pandemic is taking a terrible toll in human life and in the livelihoods of millions the world over. As people and institutions struggle to contain the spread of the virus, the measures necessarily imposed have caused major economic disruptions.
