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'Black Swan' Events Could Halt Charging Bull Market

Black swan standing out among white swans in water along shore
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By Friday, 21 September 2018 10:40 AM Current | Bio | Archive

Investors would face difficult decisions on how to respond in the event of a "black swan" that disrupts the stock market in 2019.

“If 10-year treasury yields rise to 4% or higher that would catch investors by surprise,” said David Bianco, Americas chief investment officer for DWS. “We’ve been nervous about it for years and if it happened, it would be unexpected.”

Currently, 10 year Treasury yields are hovering just above 2.75%

“It would be bad for everyone who owns fixed income for 10-year Treasury yields to rise because there’d be repricing and a 10% loss on longer duration fixed income of investment grade quality,” Bianco said. “If Italy’s debt was downgraded to investment grade, that would be a black swan too.”

Bianco was joined by Josh Feinman, U.S. chief global economist with DWS, at a media luncheon on Thursday where they discussed the impact of market volatility and surprise events at their Park Avenue office in Manhattan.

“There’s a slight chance for a hard Brexit but not likely,” Feinman told journalists. “If it happened, it might spark a risk off in financial markets.”

A black swan often acts as a catalyst that causes the market to depart from the expected but it cannot be predicted. For example, pundits consider the 2016 election of President Donald Trump as a black swan because it occurred suddenly, unexpectedly and recently resulted in an unprecedented tariff war with China.

“There’s the possibility of a harder landing for China because of trade tensions,” said Feinman. “If that were to happen – which is not our base case, but can’t be ruled out –  a risk off could occur across financial markets and the U.S. would not be insulated from that.”

Trump recently announced plans to tax $200 billion in Chinese products entering the U.S.

“There’s never been an administration that has had this broad of an assault on the post-war global trading order that ironically the U.S. built,” Feinman said.

Investing in shorter duration fixed income vehicles is one way to mitigate the various risks, including valuations becoming more demanding as interest rates creep upward.

“If rates rise on the front end, you will have an ability to roll into higher interest rates if you’re invested in shorter duration fixed income bonds,” said Feinman.

DWS’ investments are 63% overweighted in equity assets, 32% allocated to fixed income and 5% in alternatives.

“We are neutral across regions on equities with a preference for emerging market Asia,” Bianco said. “It’s the one region that stands out because the sector composition has shifted towards growth stocks, such as tech, consumer and healthcare and away from value sectors.”

Juliette Fairley is an author, lecturer and TV host based in New York.

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A black swan often acts as a catalyst that causes the market to depart from the expected but it cannot be predicted.
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Friday, 21 September 2018 10:40 AM
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