New Tail Risks Emerge For 2021

The Biggest Tail Risk

The biggest tail risk the stock market faces according to fund managers is still a bond market taper tantrum. The 2nd biggest risk is higher inflation. Higher yields and higher inflation go hand in hand. The Fed will only taper QE if the vaccination rollout goes well. However, there were increases in those worrying about peak growth and issues with the vaccine rollout. Those are countervailing factors. Either we see higher inflation and yields or the vaccine rollout goes poorly.

The fact that about 6% said peak growth is a tail risk shows the market is starting to look past this bump in growth and inflation in the middle of 2021. On the other hand, there are some worries about the vaccination process. It seems like you can’t possibly worry about the vaccination rate, while also worrying about peak growth because there won’t be a huge spike in growth and a subsequent decline if the vaccination process doesn’t go well. However, one can worry about both because it’s possible America sees a boom and bust in growth while the rest of the world struggles with its vaccination process.

In early April, there were big worries about Germany’s vaccination process, but in the past couple of weeks, they have diminished. The percentage of the population that had at least 1 dose increased from 13.3% on April 6th to 16.3% on April 12th. That’s a massive burst. Germany expects to reach peak immunity by late summer/early fall.

Finally, the largest spike in the survey about tail risks was the expectation for higher taxes. This is part of the new theme we have been discussing in previous articles. The long term trend is towards higher worker unionization, higher transfer payments, higher wages, lower corporate margins, higher taxes on the rich & corporations, and more spending on infrastructure. This risk will diminish if the GOP wins the 2022 mid-term elections. They could use proposals for a tax increase as a campaign talking point.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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