TSS S10 E1: Jeffrey Sherman, Sam Lau and Jeff Mayberry 2021 - Expectations and Risks 1-13-21

DoubleLine Deputy Chief Investment Officer Jeffrey Sherman and co-host Samuel Lau with Portfolio Manager Jeff Mayberry conduct a brief recap of markets in 2020, then they turn to market expectations for 2021, and market pricings as well as possible mis-pricings. They note that Wall Street consensus estimates 1.8% for inflation in 2021 and a year-end yield of 1.3% for the 10-year Treasury seem at odds with the average sell-side forecast of 4.3% real gross domestic product (GDP) growth for the calendar year. Other topics discussed are the risks of the Federal Reserve mismanaging monetary policy amid the unknown path of the COVID-19 pandemic, limits on the utility of further asset purchases by the Fed, improvement and risks in the labor market, and the future of America’s damaged small-business sector. This episode of The Sherman Show was recorded Jan. 13, 2021.
“Wall Street is very quick to ratchet up GDP, they’re quick to ratchet up earnings estimates, anything that’s pro-growth,” Mr. Sherman says. “But even for all the talk of inflation going up, it’s shocking for me to hear that most people are essentially anchoring that to a 2% number.” Mr. Lau replies that perhaps Wall Street has a “fool me once, fool me twice mentality” after inflation’s repeated failure to accelerate despite past forecasts calling for higher prices.
With respect to sell-side analysts’ possible complacency regarding Treasury yields, Mr. Mayberry says Wall Street is counting on the Federal Reserve. “Markets are thinking that if we get too high of rates, it starts to affect equity markets, and you could start to see the Fed step in. Maybe not necessarily [with] explicit yield curve control, but pick up the pace of their purchases,” he says. “They’ve said they’re going to buy at least $80 billion Treasuries a month and $40 billion mortgages a month. The key word there is `at least,’ so what they’re saying is, `We can buy more.’ If rates go up to a place where the stock market as the risk barometer starts to feel a little bit shaky, they could pick up their purchases, and that will keep rates capped at a certain level.”

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