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Here’s The biggest Risk For The Stock Market This Year, As reported by Morgan Stanley Experts

Unprecedented spending by each lawmakers as well as the Federal Reserve to stave off a pandemic-induced market crash helped drive stocks to new highs last year, but Morgan Stanley professionals are uneasy that the unintended consequences of pent-up demand and additional cash once the pandemic subsides could possibly tank markets this year-quickly and abruptly.
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Key FACTS
The largest market surprise of 2021 may be “higher inflation compared to many, including the Fed, expect,” Morgan Stanley analysts said in a note on Monday, arguing that the Fed’s substantial spending throughout the pandemic has moved beyond simply filling cracks left by crises and is rather “creating newfound spending which led to the fastest economic recovery on record.”

By utilizing its cash reserves to buy again some $1 trillion in securities, the Fed created a market that is awash with cash, which typically helps drive inflation, along with Morgan Stanley warns that influx could drive up prices when the pandemic subsides & businesses scramble to cover pent-up consumer demand.

Within the stock market, the inflation risk is actually greatest for industries “destroyed” by the pandemic and “ill-prepared for what could be a surge in demand later this year,” the analysts said, pointing to restaurants, other consumer and travel and business related firms which could be made to drive up prices in case they’re not able to meet post Covid demand.

The best inflation hedges in the medium term are actually stocks and commodities, the investment bank notes, but inflation may be “kryptonite” for longer-term bonds, which would ultimately have a short-term negative impact on “all stocks, must that adjustment occur abruptly.”

Ultimately, Morgan Stanley estimates firms in the S&P 500 might be in for an average eighteen % haircut in their valuations, relative to earnings, if the yield on 10-year U.S. Treasurys readjusts to match up with latest market fundamentals an increase the analysts said is actually “unlikely” but should not be entirely ruled out.

Meanwhile, Adam Crisafulli, the founder of Vital Knowledge Media, estimates that the influx in Fed and government spending helped boost valuation multiples in the S&P by a lofty 16% more than the index’s fourteen % gain last year.

Crucial QUOTE
“With global GDP output currently back to the economy and pre pandemic levels not but even close to fully reopened, we think the chance for more acute price spikes is higher compared to appreciated,” Morgan Stanley equity strategists led by Michael J. Wilson said, noting that the rapid rise of bitcoin as well as other cryptocurrencies is a sign markets are already beginning to consider currencies enjoy the dollar could be in for an unexpected crash. “That adjustment of rates is only a question of time, and it is more likely to transpire fast and with no warning.”

KEY BACKGROUND
The pandemic was “perversely” positive for big corporations, Crisafulli said Monday. The S&P’s fourteen % gain pales in comparison to the larger and tech-heavy Nasdaq‘s eye popping 40 % surge last year, as firms-boosted by federal government spending-utilized existing methods as well as scale “to develop as well as preserve their earnings.” As a result, Crisafulli concurs that rates should be the “big macroeconomic story of 2021” as a waning pandemic unearths upward cost pressure.

Big NUMBER
$120 billion. That’s how much the Federal Reserve is actually spending each month buying back Treasurys along with mortgage-backed securities after initiating a considerable $700 billion asset purchase program in March. The U.S. federal government, meanwhile, has authorized some $3.5 trillion in spending to shore up the economic recovery as a result of the pandemic.

CHIEF CRITIC
Chicago Fed President Charles Evans said Monday he had “full confidence” the Fed was well positioned to help spur a strong economic recovery with its current asset purchase program, and he more mentioned that the central bank was open to adjusting its rate of purchases once springtime hits. “Economic agents needs to be equipped for a period of very low interest rates as well as an expansion of our balance sheet,” Evans said.

What to WATCH FOR
President-elect Joe Biden nominated former Fed Chair Janet Yellen to head up the Treasury Department, an indication the federal government might work more closely with the Fed to help battle economic inequalities through programs including universal standard income, Morgan Stanley notes. “That is exactly the ocean of change which can result in sudden results in the financial markets,” the investment bank says.

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