The US Federal Reserves balance sheet ballooned to $US7 trillion ($9.7 trillion) as it pumped liquidity into the financial system, ramping up Treasury purchases and wading into the corporate bond market for the first time. The central banks largesse, combined with a wave of follow the Fed bond-buying, pushed Treasury yields to historic lows and kept corporate borrowing cheap. That was bullish for stocks, too. Investors saw that companies would still be able to get credit, and the slim yields on bonds made equities look like a better deal.
Some worry that a return to normal could lead to a replay of what happened in 2013, when investors took fright as the central bank signalled it would wind down the quantitative easing program it began after the financial crisis. Stocks and bonds fell in tandem then.
The risk is a taper tantrum, says George Mussalli, head of research and chief investment officer for equities at PanAgora. Thats what everyone is going to be worried about.
It might be a matter of execution, says Yousef Abbasi, global market strategist at StoneX, a financial services network. The Fed will have to gently and carefully pull back from the policy measures enacted during the pandemic, and it will likely create a period of elevated volatility and indigestion for these markets, he says. That is, of course, unless [Fed] chairman Jay Powell is a better magician than his contemporaries.
2. Everything just gets more expensive
Maybe worrying about a taper tantrum is overthinking it. Were talking about a vaccine to tame a virus thats stopped the global economy in its tracks. If there is anything that would cause a major rally, that would have to be it, says Randy Frederick, vice-president of trading and derivatives for the Schwab Centre for Financial Research.
The Fed wouldnt necessarily rush to step away from huge stimulus efforts. Before the pandemic hit, it was still only gradually unwinding its response to the 2008 crisis. Once you start quantitative easing as, we did many years ago, its going to be hard to stop, and thats pretty much what weve seen across the globe, says Katy Kaminski, chief research strategist and a portfolio manager for AlphaSimplex Group.
Even after people start getting their shots, the US unemployment rate will take some time to decline from its current 10 per cent. Effectively, the Fed wants rates low and credit conditions easy, providing more fodder for the recovery, says Gennadiy Goldberg, a senior US rates strategist at TD Securities. The result could be a supercharged status quo across markets, whereby already expensive stocks continue climbing and the Feds backstop keeps bond values high and their yields low.
3. Value revival
Value stocks shares trading at low prices relative to their earnings or assets might emerge as the new winners in a post-vaccine world. Thats particularly the case for such laggards as airlines, consumer companies selling non-essential items, and financial companies, says Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.
A vaccine that lets people travel, eat out, and shop at the mall again could give companies other than the tech giants a fighting chance.
The value case leans on the fact that the current bull market hasnt actually been so great for many stocks. Gains have been concentrated in a handful of tech-related stocks that investors see as particularly well-suited for the stay-at-home economy. Take Alphabet, Amazon.com, Apple, Facebook, and Microsoft out of the picture and the S&P 500 would have been down more than 2 per cent for the year, instead of its gain of 4.7 per cent. A vaccine that lets people travel, eat out, and shop at the mall again could give other companies a fighting chance.
The caveat to all of these scenarios, of course, is that creating an effective vaccine is no easy feat. Neither is disseminating it broadly. In the end, something like a taper tantrum would count as a relatively good problem to have especially if investors have been implicitly assuming an eventual vaccine and baking that into current prices.
The failure to produce a vaccine would mean that herd immunity will be the only effective path toward ending the pandemic, says Peter Berezin, chief global investment strategist at BCA Research in Montreal. This would be highly disappointing for risk assets. In other words, for stocks.
– with reporting by Katherine Greifeld, Gregor Stuart Hunter and Eric Lam
Bloomberg Businessweek
Home>>Finance>>A return to normal – when it comes – should be a boon for investors, but it’s not that simple. Here are three scenarios gleaned from experts.
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