It was a tough week for stock market investors but the primary driver of the chaotic crumble in small caps and tech stocks was not one of the usual suspects and even for those who consider themselves ‘hedged’ or balanced it was the worst week in 7 months.
The blame for this blight on Americans’ wealth was placed squarely on the shoulders of the bond market and its violent and high velocity lurch higher in yields.
Yields rose across the curve on the back of strong US economic data and hawkish comments from Federal Reserve Chairman Powell, forcing equity investors to reevaluate the higher rate environment.
To be sure, the absence of uncertainty has been bewildering given the fact that the US government’s budget deficit has swelled, contributing to the country’s debt load, now at $21.5 trillion. Meanwhile, corporate America has gone on a borrowing spree to take advantage of near-record low rates. In fact, according to Bloomberg, excluding financials, S&P 500 companies have more than doubled their borrowings to $5 trillion over the past decade.
“There are a lot of people waiting for the world to end because of this bond market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, which oversees $156 billion.
“Low rates will keep going forever — a lot of justification for high valuations is based on the assumption. That assumption is largely broken.”
And, as Bloomberg notes, prophesies of doom are everywhere.
There’s billionaire investor Stan Druckenmiller, who says our “massive debt problem” will ignite a crisis.
Oaktree Capital’s Howard Marks warns that public and private debt will be “ground zero when things next go wrong.”
And Citadel’s Ken Griffin sees a credit binge ending badly.
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