What’s next after stock market bubbles and Archegos chaos punctuate Q1 trading?

Will a raucous first quarter of 2021 give way to a greater spark in segments of the US stock market after blocked trading channels, increases in borrowing costs driven by high bond yields and a starvation? Absolute to get rich quick in the next three months of the year?

No one seems to know, but investors were unfazed by the warning signs issued by the Archegos Capital Management blackout last week. The domino effect of the implosion of the family office of Bill Hwang, a protégé of famed investor Julian Robertson, could generate a $ 10 billion hit for banks that were part of a series of complex bets using lots of money loaned by the family. office. , according to a report by JPMorgan Chase & Co. JPM, + 0.97%. Credit Suisse CS, + 0.94% and Nomura NMR, have said they expect to incur losses due to market volatility believed to be associated with Archegos. Even Wells Fargo WFC, + 1.43%, struggling with its own reputational bumps, was involved in the complex trades, but has stated that it does not anticipate losses due to the $ 30 billion recovery from Archegos stakes. Do you want to understand the future of cryptocurrencies and NFTs? Sign up for MarketWatch’s free live event: https://events.marketwatch.com/crypto/home drives stocks in so-called meme stocks like GameStop Corp. GME, + 0.86% and AMC Entertainment Holdings AMC, – 8.33% to impressive heights in the first quarter. However, Hwang reportedly applied a playbook similar to that used by retail raiders. The Wall Street Journal reported that the founder of Archegos used to place concentrated bets within his portfolio that returned his returns and that he “liked to focus on stocks that were very ‘short’ or had a high level of bearish positions,” citing one person. . familiar with investment manager operations. If that strategy sounds familiar, that’s Reddit investing 101. And it turns out that serious family offices have become a much riskier part of the market, adopting “investment strategies used in previous decades by the most aggressive hedge funds,” Gregory Zuckerman of WSJ. reports, with 69% of these offices established in the past two decades perhaps as regulatory scrutiny on hedge funds intensified. To be sure, the Archegos story does not appear to be a downsizing of Long Term Capital Management, which suffered seismic losses in 1998 that caused shock waves in global markets, but the event comes at a precarious time for investors and continues to target. to the accumulation of foam in the financial system amid historically low interest rates and almost incessant liquidity. A separate JPMorgan report dated March 30 said the Archegos explosion was surprising. “The Archegos events raise questions about leverage in the financial system,” wrote analysts, including Nikolaos Panigirtzoglou. JPMorgan’s conclusion is that hedge fund leverage, in particular, has increased again since 2017 “and is currently at the highest level since 2007,” but notes that the levels of borrowed funds remain significantly below those. historical high levels around the long-term capital management crisis. . Still, MarketWatch has also been curious about investors’ ability to rule out calamities like Archegos and the Redditors-fueled turmoil. “The market is well positioned to handle things like this with all the liquidity the Fed provides,” Jeff Buchbinder, equity strategist at LPL Financial, told MarketWatch in an interview on Friday. Buchbinder said the market did not perceive GameStop or Archegos as systemic risks, and serious concerns about the integrity of financial markets would have been perceived in widening credit spreads, reflecting the spread between what companies pay to borrow. money compared to the government. Bond yields also maintained an upward trend in the first quarter, as investors continued to shift from risk-free debt to assets that could perform better as the economy recovers from COVID. The yield on the 10-year Treasury note TMUBMUSD10Y, 1.719% ended the week at 1.714%, with the bond market closing early at 12pm ET in observance of Good Friday. Buchbinder says investors are more concerned about the Federal Reserve, inflation and the outlook for the economy than about implosions similar to those of hedge funds and Redditors. “Something we haven’t seen is inflation and a lot of people are worried about an inflation scare,” the analyst said. The expectation of an increase in consumer prices comes as the US economy added 916,000 new jobs in March, well above the 675,000 average forecast of analysts surveyed by Dow Jones, with the unemployment rate falling to 6% from 6.2%. Some fear those healthy numbers herald a surge in the job market that could force the Federal Reserve to reconsider its projections for when easy money policies will normalize, currently around 2023 and 2024. Little, but the market never really believed that they would wait until 2024 before raising rates, anyway, “said Buchbinder. The LPL analyst said the biggest fear – one the market may not be ready for right away – is that the Fed’s bond buying will slow in the fall of this year. To aid economic recovery is $ 1.9 trillion in Congressional COVID aid being distributed to small businesses and individuals recovering from the pandemic. President Joe Biden‘s $ 2.3 trillion infrastructure proposal, which would also come alongside tax increases, could further boost the economy even as it potentially slows the bull market for higher-cost-of-borrowing stocks. Read: These infrastructure stocks could rise as much as 41% in a year with Biden’s massive spending plan, analysts say: “The market is most likely worried about the Fed and that could slow this down [stock-market] moving forward as we value this economic recovery in the spring, ”said Buchbinder. What should investors do in that context? LPL continues to warn that a good dose of value, stocks that are considered undervalued against a metric like book value, should be in investors’ portfolios, but it also believes that selected growth-oriented stocks, which promise growth of above-average earnings, they will perform well. also in the long term. In fact, Louis Navellier, founder of the asset management company Navellier & Associates, says that semiconductor companies, despite the chip issues, could be a good bet in 2021. “High-tech companies that are Crucial suppliers for cyclical companies will benefit greatly from the economic rebound, possibly more than the companies they supply, “Navallier wrote in an April 1 research note.” The bottom line is that regardless of the ongoing growth versus value debate, the chip and chip equipment sector can claim to be both value and growth, ”he writes. “In the short term, the stock probably has a little edge,” Buchbinder said. The LPL analyst also said that investors should not be afraid to hold bonds as yields rise and prices fall because they still represent a hedge against the coming stock market shocks, particularly if the yield surge to 10 years is capped at about 2%. However, durations should be kept short, and LPL recommends maturities of three to five years in fixed income. On Thursday, with the US stock market closed on Good Friday, the S&P 500 SPX Index, + 1.18% achieved its record close 16 of 2021, while the Dow Jones Industrial Average DJIA, + 0.52% marked its second highest result in history. less than 0.1% from its closing all-time high at 33,171.37, recorded early last week. The performance-sensitive Nasdaq Composite COMP + 1.76% is 4.4% from its all-time high on February 12. So will this Wall Street party last forever? “At some point, the Fed is going to take the punch out of it,” Buchbinder said, and perhaps then events like Archegos are more important to the markets.