“I’m not saying that the market’s going to go down 20% tomorrow but I am saying that there is sensitivity,” Jonathan Pollock, Elliott Investment Management co-CEO, told the Bloomberg Invest Global conference. (Source: Bloomberg)
HOST: It looks like inflation and interest rates are likely to continue to rise. What does that mean for the broader market?
JONATHAN POLLACK: I think we’ve all enjoyed the benefits of low rates for a long time.
Anyone that’s managed to put risk on the page in the last 13 years, but more specifically the last 18 months, has been well rewarded.
I’m not sure it’s all genius. I think those tailwinds have made us all look good. But now I think the cycle is evolving.
So, what does that mean?
Taking a step back, I don’t know if you’ve seen these numbers, household wealth has increased by about $5 Trillion in the last five quarters. I think we are at all-time highs for household wealth vs. nominal GDP.
At the same time, we have household wealth with an almost 50% allocation to equities. So you start to think about, is there real sensitivity to rates? Is that wealth imperiled?
Bank of America did some work on the S&P and figuring out what the duration of the S&P was. I think they came up with 36 years, and composition makes a lot of difference with high-growth companies.
But then Goldman did the same analysis for the Russell 1000 and came up with 22 duration for equities. if you start fooling around with the numbers, a 100 basis point move for a 22 duration-zero coupon, it is a big move. Down 25%.
I’m not saying that the market’s going to go down 20% tomorrow but I am saying that there is sensitivity. Where that attachment point is is a whole other question.
HOST: Do you have any sense of when that might occur, why the market is not reacting at this point?
POLLACK: I think it’s really, really difficult to know right now. It feels like we’re in this Goldilocks moment with the Delta variant behind us, people coming back to value, rates rising.
Just in August, rates were up, the ten-years at $110 were up 40 basis points. And you haven’t seen any real move in equity. It is hard to know when it comes, but right now with earnings growing, and the recent past when it has only paid to buy the dips, I think that mentality is kind of still in full swing.