Fed’s accommodative monetary policy means it’s time for active management: Mohamed El-Erian

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Last year it was difficult to find an underperforming asset class. U.S. stock indices rose in 2020, after plunging at the start of the coronavirus pandemic. The prices of government and corporate bonds rose as yields contracted. Bitcoin has quadrupled. Gold rose 24%.

This even outperformance has been much harder to achieve so far in 2021. All three major stock averages have peaked several times, but the Nasdaq (^ IXIC) has fallen about 7% since its last record on 12 February. Bitcoin (BTC-USD) suffered some double-digit percentage declines, although it remains higher since the start of the year. Most of the declines in risky assets were triggered by rapid increases in yields on Treasuries, reflecting markets digesting the potential for inflation and the Federal Reserve’s willingness to let the economy run at full capacity.

Today, one of the best-known macro-strategists, Mohamed El-Erian, says that due to current Fed policies, investors should become more active.

“It will be a very active management environment, building portfolios from a bottom-up perspective,” El-Erian told Yahoo Finance Live. The president of Queens’ College at the University of Cambridge and chief economic adviser to Allianz is known for his writings and opinions on macroeconomic issues. This thinking, of course, remains relevant even if investors must take a close look at their choices.

“We had a very unusual situation where the economy was in trouble, and you made money on both your risky assets and your risk-free assets. last, ”he said. But the situation is now reversed. Even as many economic measures improve (in March, for example, a business activity index in the Philadelphia area hit its highest level since 1973), volatility in risk assets has increased.

El-Erian highlights three issues that investors must now consider:

  • “Will the Fed lose control of the bond market?

  • “Will this completely change the psychology of the market?”

  • “Is this going to have a negative impact on the economy? “

And he offers his thoughts: “My point is that the Fed is in danger of losing control of the bond market. Second, it will shake the liquidity paradigm. But third, it won’t hurt the economy.

That said, the seasoned investor advises caution when it comes to stocks. (This is why El-Erian says you shouldn’t spend your stimulus check on the riskier assets).

As he wrote in a recent Financial Times editorial, investors should use four screens when selecting stocks: “strength in balance sheets, positioning in fast-growing parts of the global landscape, presence in sectors that are not vulnerable to long-lasting COVID- 19 disruption and strong leadership teams. “

Julie Hyman is the co-host of Yahoo Finance Live, weekdays 9 a.m. to 11 a.m. ET.

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