The Biggest Tail Risk

The chart below shows what investors consider to be the biggest tail risks according to the Bank of America March poll. The COVID-19 vaccine rollout is no longer the biggest risk factor as it fell from almost 30% to almost 15%. Some are saying this indicates the pandemic is over. That’s overzealous and also incorrect if you’re looking to the market to decide when it’s over. Of course, the pandemic is not over because people are still dying from it. The 7-day moving average of deaths per day in America is 1,173. That’s still quite high. It’s ironic that right after this poll was done, news that some European countries suspended the use of the AstraZeneca vaccine came out.

If you’re looking to the market to project when the pandemic is over, the beginning of the end of the pandemic was in early November when the positive vaccine news came out. This survey just shows how little good vaccine news will impact the markets. There’s a high probability that the pandemic will be over this summer in America. On the other hand, bad news would be devastating because expectations are so optimistic. The two biggest risks are almost the same thing. They are higher than expected inflation and a tantrum in the bond market. Long term treasury bonds will sell off if inflation is higher than expected.

Sometimes investors blame quick moves in the long bond for selloffs in risky stocks. We find this absurd because the long bond has actually reacted quite slowly to the news of more stimulus and strong vaccine distribution in America. The fact that the bond market is still selling off now without any major news in the past few weeks shows how delayed the reaction has been. We’d call the move swift if the 10-year yield had hit 2% in January. If you own a stock that crashes because the 10-year yield is at 2%, you have a terrible stock. A 2% 10-year yield is very low historically. That stock probably was destined to fall anyway.

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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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