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Mohamed El-Erian says ‘trifecta’ of dangers will haunt the US economy in 2022 — here’s how to protect your portfolio

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Mohamed El-Erian says ‘trifecta’ of dangers will haunt the US economy in 2022 — here’s how to protect your portfolio

The January effect — a tendency for stock prices to rise at the start of the year — is at it again, as both the Dow Jones and S&P 500 reached new intraday records on Tuesday.

Yet trouble is looming just over the horizon, says Mohamed El-Erian, president of Queens’ College, Cambridge University, and chief economic advisor at Allianz SE.

In a recent interview with Bloomberg, the economist highlights a “trifecta” of risks facing the U.S. economy going into 2022.

“Who would have guessed that you would have inflation at 6.8%, you’d have the 10-year at around 150, and you would have 70 record highs on the S&P?” he asks.

Here’s what those three risk factors mean for investors and how you might hedge against them — including one exotic asset you probably haven’t considered.

Spiking inflation

Minded man viewing receipts in supermarket and tracking prices

Denys Kurbatov / Shutterstock

Inflation erodes our purchasing power. If you’re holding cash, you won’t be able to purchase the same amount of goods and services as before.

And as El-Erian points out, November saw a 6.8% year-over-year increase in the consumer price index — the biggest spike since 1982.

You can try to protect yourself in a few different ways.

Some stock market sectors tend to do well in an inflationary environment. Energy stocks, for instance, have made a strong comeback: In the past year, Chevron surged 41%, ExxonMobil rose 54%, while ConocoPhillips shares shot up a whopping 83%.

Other investors prefer to stick with traditional inflation hedges like gold and silver, which can’t be printed out of thin air like fiat money.

Meanwhile, more and more people are calling Bitcoin the new gold. Investors can either buy bitcoins directly or get exposure through companies that have tied themselves to the crypto market, such as Coinbase Global, MicroStrategy and Tesla.

Rising interest rates

Jerome Powell

Federal Reserve/Flickr
Jerome Powell, chairman of the Federal Reserve

The days of cheap borrowing seem to be coming to an end, as the Fed has hinted at multiple rate hikes in 2022 to combat inflation. El-Erian worries that the economy won’t be able to handle it.

“A system conditioned by more than a decade of floored interest rates and ample liquidity would quickly prove unable to tolerate higher rates,” he wrote in a Financial Times column earlier this week.

At the end of December, El-Erian pointed out that the U.S. 10-year Treasury note was yielding 1.50%. A week later, the yield has already gone up to 1.73%.

Still, while many market participants fear higher interest rates, some financial companies — especially banks — look forward to them. Banks lend money at higher rates than they borrow with, pocketing the difference. As interest rates increase, the spread earned by banks widens.

Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley have all posted strong earnings growth over the past year, and all of them have increased their dividend payout to shareholders.

If you’re not sure which to choose, or you don’t want to bet on individual stocks at all, you can always build a diversified portfolio of blue-chip stocks that pay you regular dividends — and you can do it just by using some of your “spare change.”

Stocks at record highs

S&P 500 sign

Pavel Ignatov/Shutterstock

Finally, El-Erian worries about 70 companies in the S&P 500 trading at all-time highs, suggesting that the market is overheating.

It’s increasingly hard to find stocks to “buy low and sell high” when the index itself is climbing to record levels.

Still, some fast-growing companies have recently seen their share prices beaten down into more affordable territory.

PayPal Holdings, for instance, grew its revenue by 13% year-over-year and total payment volume by 26% year-over-year in Q3 of 2021. Yet its stock has fallen 34% over the past six months.

You can also look at Zoom Video Communications, which used to be one of the hottest pandemic plays. The company continues to expand as revenue surged 35% year-over-year to $1.05 billion in its most recent fiscal quarter. But the stock is down 55% over the past six months.

If you do want to invest in one of today’s high-priced stocks, remember you don’t have to blow hundreds or thousands on a full share of Tesla or Amazon. Some investing apps allow you to buy fractions of shares with as much money as you’re willing to spend.

A finer way to hedge?

Visitors attend the biggest in Canada exhibition of works of pop art legend Andy Warhol in Yaletown warehouse in Vancouver, Canada.

Sergei Bachlakov/Shutterstock

At the end of the day, stocks are volatile. Stocks that hit new highs could keep rising out of reach. Likewise, not all beaten-down stocks will bounce back.

If you want to invest in something that has little correlation with the ups and downs of the S&P 500, consider some overlooked real assets, like fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a physical asset with little correlation to the stock market. On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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Teladoc Tumbled 38% After Big First-Quarter Loss. Is It Just a Pandemic Play?

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After pandemic drop, Canada’s detention of immigrants rises again By Reuters

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© Reuters. FILE PHOTO: Two closed Canadian border checkpoints are seen after it was announced that the border would close to “non-essential traffic” to combat the spread of novel coronavirus disease (COVID-19) at the U.S.-Canada border crossing at the Thousand Isla

By Anna Mehler Paperny

TORONTO (Reuters) – Canada is locking up more people in immigration detention without charge after the numbers fell during the pandemic, government data obtained by Reuters shows.

Authorities cite an overall rise in foreign travelers amid easing restrictions but lawyers say their detained clients came to Canada years ago.

Canada held 206 people in immigration detention as of March 1, 2022 – a 28% increase compared with March 1 of the previous year. Immigration detainees have not been charged with crimes in Canada and 68% of detainees as of March 1 were locked up because Canada Border Services Agency (CBSA) fears they are “unlikely to appear” at an immigration hearing, according to the data.

The rise puts Canada at odds with Amnesty International and other human rights groups that have urged Ottawa to end its use of indefinite immigration detention, noting CBSA has used factors such as a person’s mental illness as reason to detain them.

A CBSA spokesperson told Reuters that “when the number of entries (to Canada) goes up, an increase in detention is to be expected.” CBSA has said in the past it uses detention as a last resort.

A lawyer told Reuters her detained clients have been in Canada for years.

In the United Kingdom, too, immigration detention levels rose last year after dropping earlier in the pandemic, according to government statistics. Unlike Canada, the United States and Australia, European Union member states have limits on immigration detention and those limits cannot exceed six months.

The rise in detentions puts people at risk of contracting COVID-19 in harsh congregate settings, refugee lawyers say.

Julia Sande, Human Rights Law and Policy Campaigner with Amnesty, called the increase in detentions “disappointing but not surprising,” although she was reluctant to draw conclusions from limited data.

The number of immigration detainees in Canada dropped early in the pandemic, from a daily average of 301 in the fourth quarter (January through March) of 2019-20 to 126 in the first quarter (April through June) of 2020-21.

FEW NO-SHOWS AS DETENTIONS DROPPED

Detaining fewer people did not result in a significant increase in no-shows at immigration hearings – the most common reason for detention, according to Immigration and Refugee Board data.

The average number of no-shows as a percentage of admissibility hearings was about 5.5% in 2021, according to that data, compared to about 5.9% in 2019.

No-shows rose as high as 16% in October 2020, but a spokesperson for the Immigration and Refugee Board said this was due to people not receiving notifications when their hearings resumed after a pause in the pandemic.

Refugee lawyer Andrew Brouwer said the decline in detention earlier in the pandemic shows Canada does not need to lock up as many non-citizens.

“We didn’t see a bunch of no-shows. We didn’t see the sky fall … It for sure shows that the system can operate without throwing people in jail,” Brouwer said.

He added that detainees face harsh pandemic conditions in provincial jails – including extended lockdowns, sometimes with three people in a cell for 23 hours a day.

Refugee lawyer Swathi Sekhar said CBSA officials and the Immigration and Refugee Board members reviewing detentions took the risk of COVID-19 into account when deciding whether someone should be detained earlier in the pandemic but are doing so less now.

“Their position is that COVID is not a factor that should weigh in favor of release,” she said.

“We also see very, very perverse findings … [decision-makers] outright saying that individuals are going to be safer in jail.”

The Immigration and Refugee Board did not immediately respond to a Reuters request for comment.

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Nasdaq futures rise as market attempts comeback from April sell-off, Meta shares soar

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Stock futures rose in overnight trading as the market shook off the April sell-off and investors reacted positively to earnings from Meta Platforms.

Futures on the Dow Jones Industrial Average added 70 points or 0.2%. S&P 500 futures gained 0.7% and Nasdaq 100 futures jumped 1.2%.

The moves came as shares of Meta surged more than 18% after hours following a beat on earnings but a miss on revenue, a sign that investors may see signs of relief in the beaten-up tech sector. Shares were down 48% on the year heading into the results.

Meanwhile, shares of Qualcomm gained 5.6% in extended trading on the back of strong earnings while PayPal rose 5% despite issuing weak guidance for the second quarter.

“I think a lot of people want to believe that earnings are going to pull us out of this, but earnings are not what got us into this,” SoFi’s Liz Young told CNBC’s “Closing Bell: Overtime” on Wednesday. “… But the reality is there are so many macro headwinds still in front of us in the next 60 days that the market is just hard to impress.”

The after-hour activity followed a volatile regular trading session that saw the Nasdaq Composite stoop to its lowest level in 2022, as stocks looked to bounce back from a tech-led April sell-off. The index is down more than 12% since the start of April.

In Wednesday’s regular trading, the tech-heavy Nasdaq ended at 12,488.93, after rising to 1.7% at session highs. The Dow Jones Industrial Average rose 61.75 points, or 0.2%, to 33,301.93 propped up by gains from Visa and Microsoft, while the S&P 500 added 0.2% to 4,183.96.

Investors await big tech earnings on Thursday from Apple, Amazon and Twitter, along with results from Robinhood. Jobless claims are also due out Thursday.

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