In elevated financial markets, risk is rarely eliminated. It is usually only relocated. During the run-up to the 2008 financial crisis, mortgage risk did not disappear. It was transformed, repackaged, and spread across the system in ways that made it appear safer than it was.
As political pressure on the Federal Reserve intensifies and markets ponder the nomination of a new Chair, understanding this chain of risk is increasingly important for investors. Equity valuations are heavily affected by expectations for long-term cash flows, along with the interest rates and risk-premiums that drive how much investors are willing to pay for those future dollars.
With the federal government open after its longest shutdown on record, we will soon get a clear indication of how payrolls fared in September and October.
One of the biggest challenges investors face today is navigating the most concentrated U.S. stock market in history, where the largest stocks represent a record share of total market value.
Whether investors are ready or not, global monetary tightening cycles are fast approaching.
