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Behind every market record is the generosity of the US Central Bank

The sweet spot for risk assets and the Fed may be one where economies do well, but not too well; strong enough to prop up the economy, but not so strong that inflation starts to take off. Strategists at companies such as Morgan Stanley, Goldman Sachs and JPMorgan expect overall markets to do well through 2021 as vaccines for COVID-19 become available and the global economy continues to recover.

With prices so tight, everything could collapse if the economy heats up so much that inflation takes off and the Fed begins to consider withdrawing support, or even raising rates.

For now, however, many strategists seem comfortable with the current situation, based on Fed Chairman Jerome Powell’s assertion in June that “we are not even thinking about raising rates.” The consensus among strategists is for more stimulus, rather than less, and overnight index swaps are not pricing a Fed raise until late 2023.

“We believe the Fed is quietly following the situation and will not allow the market to alter its lower rate stance any longer,” said Anders Faergemann, a fund manager at PineBridge Investments in London. “It would be too early to speak or position yourself for another bond selling tantrum.”

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