Professional investors have a new No. 1 fear. In a survey of fund managers, inflation toppled Covid-19 as the biggest threat to the bull market.
Some 220 respondents with a combined $630 billion in assets under management took part in the BofA Securities survey. Less than 15% had the vaccine rollout as their top risk, down by about half from BofA’s February survey. In March, higher inflation was the most-cited risk, at 37%. An all-time high 93% of respondents expect higher inflation over the coming year. Some 91% see the economy improving and 48% said we’re in a “V-shaped recovery.”
But higher bond yields mean higher borrowing costs, which could hinder the recovery and weigh on corporate earnings. Plus, a higher discount rate produces a lower present value for assets like stocks. And when Treasuries produce enough yield, there’s greater competition for stocks.
“Nobody believed that rates at 1.5% would cause an equity correction,” wrote BofA’s chief investment strategist Michael Hartnett. “But the move from 1.5% to 2% is critical, as 43% of investors now think 2% is the level of reckoning in the 10-year Treasury that will cause a 10% correction in stocks.”
So far, rising bond yields haven’t stopped the bull. But dynamics have changed. Value stocks have outperformed growth stocks, with far-off cash flows worth less under a higher discount rate. Some 52% say value will beat growth this year. That’s a narrow margin, but after a decade of growth outperformance, value stocks have more fans than they’ve had in a long time.
Dow Jones Industrial Average
hit its 14th record of 2021 on Monday, then sagged as bond yields rose before the Federal Reserve met on rates. The Fed reiterated its accommodative stance, and stocks raced off, then flagged as yields rose and oil fell. On the week, the Dow lost 0.5%, to 32,627.97; the
fell 0.8%, to 3913.10; and the
shed 0.8%, to 13,215.24.
A host of European nations suspended use of AstraZeneca’s Covid-19 vaccine after a small number of blood-clotting cases appeared. The company denied that the clotting was related to the vaccine, and the European Medicines Agency said after an investigation that there was no link, urging continued vaccinations. In the U.S., cases are down nearly 80% since January. Signs of reopening were evident as Americans began to travel again.
Spend and Tax
The White House has discussed a tax on high earners or corporations to help pay for Covid-19 relief and infrastructure. Treasury Secretary Janet Yellen, meanwhile, is using the Organization for Economic Cooperation and Development to press for a global minimum corporate tax that would end decades of corporate tax-cutting competition. Yellen has signaled that she might make concessions on a digital tax in exchange for steps to put a floor under corporate taxes.
Reverberations from a hack of Microsoft exchange servers, possibly from China, rumbled through the cybersecurity world. The hack, which may affect hundreds of thousands of email accounts, follows the similarly massive SolarWinds incursion, possibly from Russia, which hit federal agencies. The attacks used servers within the U.S. to elude government cyberdefenses focused on external attacks.
The Case Against Alibaba
The Chinese government told Alibaba Group Holding to shed its sizable media assets, arguing that they give the online retailer too much power over public opinion. Alibaba owns a $3.5 billion stake in Weibo, a $2.6 billion stake in video platform Bilibili, a stake in the South China Morning Post in Hong Kong, and some U.S. media properties. Separately, the U.S. and China met in Alaska to attempt a reset of their relationship. Both sides aired grievances.
Annals of Deal Making
Online payments processor Stripe, riding a wave of e-commerce, raised $600 million more in venture funding, giving it a $95 billion valuation…The Blackstone Group and Starwood Capital agreed to acquire Extended Stay America for $6 billion…Canada’s Rogers Communications said it would buy Shaw Communications for $16 billion…Roche Holding agreed to pay $1.8 billion for GenMark Diagnostics…The Federal Trade Commission is looking to take a “more aggressive approach” to biopharma deals, in part to bring prices down.
Write to Nicholas Jasinski at [email protected]