Last year, it was tough to find an asset class that was underperforming. U.S. stock benchmarks rose in 2020, after plunging at the onset of the coronavirus pandemic. Government and corporate bond prices rose as yields contracted. Bitcoin quadrupled. Gold rose 24%.
That uniform outperformance has been a lot harder to come by thus far in 2021. All three major stock averages have hit highs on multiple occasions, but the Nasdaq has fallen about 7% since its most recent record on Feb. 12. Bitcoin has suffered a couple of double-digit percentage pullbacks, although it remains higher year-to-date. Many of the declines in risk assets have been triggered by rapid increases in Treasury yields, reflecting markets digesting the potential for inflation and the Federal Reserve's willingness to let the economy run hot.
Now one of the best-known macro strategists, Mohamed El-Erian, is saying that because of the Fed's current policy, investors should get more active.
"It's going to be an environment for very active management, building portfolios from a bottom-up perspective," El-Erian tells Yahoo Finance Live. The president of Queens' College, Cambridge University and chief economic advisor to Allianz is known for his writing and opining on macroeconomic issues. That thinking, of course, remains relevant even as investors have to closely scrutinize their choices.
"We've had a very unusual situation where the economy was struggling, and you made money both on your risk assets and on your risk-free assets. That's what we did last year," he said. But the situation has now reversed. Even as many economic measures are improving (in March, for example, an index of business activity in the Philadelphia area rose to its highest level since 1973), volatility in risk assets has increased.
El-Erian points to three issues that investors must now consider:
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"Will the Fed lose control of the bond market?"
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"Will this completely change the psychology of the market?"
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"Will this spill over in a negative way to the economy?"
And he offers his thoughts: "My view is the Fed risks losing control of the bond market. Two, it will shake the liquidity paradigm. But three, it will not harm the economy."
All of that said, the veteran investor counsels prudence when it comes to stocks. (That's why El-Erian says you shouldn't spend your stimulus check on the riskiest assets).
As he wrote in a recent Financial Times op-ed, investors should employ four screens when picking stocks: "strength of balance sheets, positioning in the faster growing parts of the global landscape, a presence in sectors that are not vulnerable to lasting COVID-19 disruptions and solid management teams."
This article originally appeared on Yahoo! Finance.
