Are You Positioned For The Coming Flight To Quality?

The S&P 500 moved to within a smidgen of a new record high earlier this week. Based on this benchmark stock market index’s recent performance, all seems well and good for risk assets.

Underneath the surface, however, warning signs are flashing for investors in financial markets.

Over the past several weeks, significant selloffs have occurred in some of the more speculative sectors and asset classes that may serve as leading indicators of trouble ahead.

Nothing is more of a pure speculation than an unbacked cryptocurrency. And since peaking in April, Bitcoin prices have plunged nearly 50%. Dogecoin has shed even more.

Meanwhile, Tesla’s stock price peaked in January, and the broader technology sector has started to underperform.

Measuring the Risks

Equity valuations overall remain historically high by many measures, including the “Buffett indicator” – total stock market capitalization as a percentage of GDP.

With bullish sentiment also at an extreme, any disappointment to investors’ rosy outlook could trigger a wave of selling and a flight to quality.

Among the risks ahead are economic growth downgrades, jobs numbers misses, rising inflation, and the potential for the Federal Reserve to start “thinking about thinking about” tapering its massive asset purchase programs.

Of course, we’re already seeing alarming inflation numbers with the Consumer Price Index running above 4%.

The Fed along with most mainstream economists assure us high inflation is just a temporary anomaly caused by base effects from last year’s economic crisis.

But other economic forecasters see a bigger, more sustained inflation problem brewing. Deutsche Bank analysts see an inflation time bomb waiting to explode.

“Inflation leaves global economies sitting on a time bomb,” they said. “The effects could be devastating, particularly for the most vulnerable in society.”

According to Deutsche’s analysis, the Fed must act sooner rather than later to rein in excess liquidity:

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Disclaimer: Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment ...

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