Unprecedented spending by both lawmakers and the Federal Reserve to stave off a pandemic-induced market crash helped stocks hit new highs over the past year However, Morgan Stanley experts are concerned that the unintended consequences of extra cash and backlog once the pandemic subsides could fuel markets quickly and abruptly this year

The biggest market surprise of 2021 could be “higher inflation than many, including the Fed, expect,” Morgan Stanley analysts said in a statement Monday, arguing that the Fed’s massive spending during the pandemic was beyond the mere filling of the remaining holes has gone out through crises and instead creates “newly discovered issues that led to the fastest economic recovery in history”

By using its cash reserves to buy back around $ 1 trillion worth of securities, the Fed has created a market that is full of cash, which typically contributes to inflation, and Morgan Stanley warns that the influx prices could skyrocket once the pandemic subsides and businesses scramble to meet pent-up consumer demand

Within the equity markets, the greatest risk of inflation is for industries “destroyed” by the pandemic and “poorly prepared for an increase in demand later this year,” the analysts said, citing restaurants, travel and other consumer- and corporate firms that may be forced to raise prices if they cannot meet demand for Covid

The best medium-term inflation hedges are stocks and commodities, the investment banknotes, but inflation can be “kryptonite” for longer-term bonds, which would ultimately have a negative impact on “all stocks” in the short term this adjustment should be done abruptly “

Ultimately, Morgan Stanley estimates that companies in the S&P 500 could get an average discount of 18% on their earnings-to-earnings valuations when the return is at 10-year US Treasurys is adjusting to current market fundamentals – an increase that analysts have labeled “unlikely” but should not be ruled out entirely

Adam Crisafulli, founder of Vital Knowledge Media, estimates that the influx of Fed and government spending helped raise the valuation multiple in S&P by a whopping 16% – more than the index’s 14% gain last year

“Since global GDP production is already back to pre-pandemic levels and the economy is not even nearly fully open again, we consider the risk of more acute price peaks to be greater than estimated,” said Michael J Morgan Stanley Wilson equity strategists noted that the rapid surge in Bitcoin and other cryptocurrencies is a sign that markets are already starting to believe that currencies like the dollar may be facing an unexpected crash. “That adjustment in interest rates is just a matter of Time and will likely be done quickly and without warning “

The pandemic has been “perversely” positive for big corporations, Crisafulli said on Monday. The 14% gain on the S&P pales in comparison to the larger, more tech-intensive 40% rise on the Nasdaq last year as companies boosted by government spending As a result, Crisafulli agrees that rates should be the “great macro story of 2021” as a dwindling pandemic exposes upward price pressures

$ 120 Billion This is how much the Federal Reserve spends each month buying back government bonds and mortgage-backed securities after launching a massive $ 700 billion asset purchase program in March The US The federal government has now approved around US $ 35 trillion spending to support the economic recovery following the pandemic

Charles Evans, president of the US Federal Reserve in Chicago, said Monday he had “full confidence” that the Fed was well positioned to drive a robust economic recovery with its current asset purchase program, and he provided also noted that the central bank would be open to adjusting its interest rate from purchases as soon as spring arrives. “Economic actors should be prepared for a period of very low interest rates and an expansion of our balance sheet,” said Evans

President-elect Joe Biden has appointed former Fed Chair Janet Yellen to head the Treasury This is a sign that the federal government could work more closely with the Fed to tackle economic inequalities through programs like the Universal Basic Income, notes Morgan Stanley. “This is precisely the ocean of change that can lead to unexpected results in financial markets “says the investment bank

The US government has more than 10 this year$ 000 per person approved for stimulus spending (Forbes)

I’m a reporter for Forbes, focused on markets and finance. I graduated from the University of North Carolina at Chapel Hill where I graduated with two majors in business journalism

I’m a reporter for Forbes, focused on markets and finance.I graduated from the University of North Carolina at Chapel Hill, where I did a dual degree in business journalism and economics as a marketing and communications assistant for the UNC’s Kenan-Flagler Business School Forbes spent a summer reporting on the LA Private Sector for the Los Angeles Business Journal and writing about publicly traded companies in North Carolina for NC Business News Wire. Reach out to jponciano @ forbescom

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World news – USA – According to Morgan Stanley Experts, this is the greatest risk for the stock market this year

Source: https://www.forbes.com/sites/jonathanponciano/2021/01/04/biggest-risk-for-stock-market-this-year/