• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

I Vote for Not Dismissing Risk

Everyone seems to be pricing in a Biden win and stimulus passing -- while shorting the dollar and eyeing the recovery basket. But they could get 'scared.'
By MALEEHA BENGALI
Oct 21, 2020 | 01:12 PM EDT

As we come closer to the U.S. presidential election, it seems the market is more or less pricing in a Biden win. But on top of that, it's also pricing in a fiscal stimulus deal passing, as well.

The heartbeat of the market in the last few weeks has changed, as previously Joe Biden was thought to be bearish for the market in general, given potentially higher taxes. But now, he is seen as a net positive, especially with the Democrats pushing for a more than $2.2 trillion fiscal package focusing on infrastructure and other things. On this backdrop, U.S. bond yields have been rallying aggressively as bonds get sold. The U.S. 10-year yield is now trading closer to 0.82%, and the 30-year above 1.6%. These levels have not been seen since June. Any higher, and we would not have seen these levels since 2018. So, what is happening and why?

The world is still hooked onto the 60-40 portfolio, whereby a natural 60% allocation to equities and a 40% allocation to bonds should, in theory, hedge a portfolio at any given time during any cycle. This only worked in the past decade, given central bank quantitative easing and no inflation, so most think it will work going forward. Wrong.

If we have a higher inflationary environment, both equities and bonds can go down -- there goes your hedge. There is no doubt we will get inflation; the Fed will make sure of it. The only problem is will this be accompanied with solid growth? This means people need to start unwinding their long bond positions, which will cause yields to rally even further. The thing about yields is that if the move higher is slow and gradual, it is a good thing as it denotes recovery. But if it is fast, that is a bad thing, as asset classes cannot handle the move. This is called the "rate scare." 

If the move in yields is fast and asset classes cannot handle it? This is called the 'rate scare.'

Right now, the market is "hoping" that we have a deal, but there is good chance that we do not get one till after the election. Strategy built on hope, but not reality, is a grave mistake. We can see even in the positioning, hedge funds have been selling technology (growth) names vs. buying energy, banks, industrials, and cyclical sensitive sectors (value) as they expect a genuine U.S. recovery in the fourth quarter. They are all teeing up for it, but what if it is delayed or uncertain?

This is not a certainty nor a fact. In fact, it is more and more likely given a second wave of lockdowns and no vaccine coming out, that the recovery is delayed. The fiscal deal is the only thing that can save the economy, and right now that is politically motivated.

White House officials and House Speaker Nancy Pelosi keep teasing the market about a 48-hour deadline to get a deal passed before election, but why would either side be motivated to do one now, pre-election? It won't be enacted before voting time, so they might as well save it for after. The Fed is on hold right now and cannot do any more QE -- and it all depends on fiscal stimulus to get the economy growing. If yields and rates move higher, the U.S. and the world economy cannot afford that as entire debt system is priced in Dollars and higher yields means higher servicing costs.

Everyone thinks it is a no-brainer to be short the dollar and long "recovery" basket, as it is a done deal. Investing is a risk vs. reward approach, for now it seems the risk is entirely ignored as everyone is short the dollar. What if, just what if, the dollar rallies from here or we get stagflation? #ouch

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Bengali had no position in the securities mentioned.

TAGS: Currencies | Interest Rates | Investing | Politics | Rates and Bonds | Stocks

More from Stocks

Time to Consider Making a Withdrawal From Webster Financial

Paul Price
Mar 3, 2021 7:00 AM EST

I typically tell you when I see opportunities to get into, not out of, stocks, but this one appears to be getting overvalued.

Complacency Is High ... and So Are New Lows

Helene Meisler
Mar 3, 2021 6:00 AM EST

I have something to fuss over, so let's look at these new lows on Nasdaq and the New York Stock Exchange.

Dreary Market Action Disappoints

James "Rev Shark" DePorre
Mar 2, 2021 4:40 PM EST

Big-cap tech names slip into the red and pockets of momentum become harder to find.

A 'Simple' Way to Play for the Rally to Resume

Mark Sebastian
Mar 2, 2021 3:23 PM EST

I believe we are heading to new all-time highs, potentially this week.

Is Ralph Lauren Stock Sharply Dressed?

Bruce Kamich
Mar 2, 2021 3:10 PM EST

The pace of RL's advance has slowed.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 06:05 PM EST PAUL PRICE

    Michael's (MIK) Up on Takeover Rumors

    The NYT says talks are underway regarding a buyout...
  • 08:09 AM EST GARY BERMAN

    Monday Morning Fibocall for 3/1/2021

    Always a good idea to know where our bounce zones ...
  • 11:51 AM EST REAL MONEY

    Watch Bob Lang and Doug Kass Discuss Short-Selling!

    Bob Lang and Doug Kass with an engaging and educat...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login