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Illustration: Aïda Amer/Axios

The Bank for International Settlements issued another warning about the detachment of U.S. equity prices from the real economy in its latest quarterly review.

Why it matters: The so-called central bank of central banks continues to warn that the gravity-defying stock market is also defying reason.

  • “We are moving from the liquidity to the solvency phase of the crisis,” Claudio Borio, head of the BIS Monetary and Economic Department, said on a call with reporters.
  • “We should be expecting more bankruptcies going forward yet credit spreads are quite low by historical standards, and indeed while banks are pricing risk more carefully we don’t see the same in capital markets.”

In the latest review, BIS researchers flagged concerns about "the daylight between valuations, which are still above or near their already stretched pre-pandemic levels, and economic prospects, which are still uncertain."

Flashback: This is not the first time BIS has warned about the disconnect of equity prices and economic fundamentals.

  • In its last quarterly review, titled "Markets rose despite subdued economic recovery," the organization said the Fed's accommodative monetary policy was responsible for “close to a half" of the runup in U.S. stock prices and "a fifth of the rebound" in European equities.
  • In September 2019, BIS warned that the extreme growth in central bank balance sheets since the financial crisis had negatively impacted the way financial markets function.
  • That report also found that negative impacts have been more prevalent when central banks hold a larger share of assets.

On another note: The December review also unveiled a study on the long-time correlation between stock and fixed income returns that drive the traditional 60/40 portfolio.

  • "Signs have emerged that the effectiveness of US Treasuries as a hedge to large equity losses may have declined in recent years."
  • "The response of 10-year yields to S&P 500 sell-offs has become more muted since 2018, possibly reflecting the Federal Reserve's limited easing space."
  • "As Fed officials have consistently communicated their reluctance to introduce negative interest rates, this not only puts a floor under short-term rates but also limits the potential decline of long-term nominal yields, regardless of any additional easing measures considered."

Go deeper

Dion Rabouin, author of Markets
Jan 20, 2021 - Economy & Business

Janet Yellen said all the right things to reassure the markets

Illustration: Aïda Amer/Axios

Treasury Secretary nominee and former Fed chair Janet Yellen's confirmation hearing before the Senate Finance Committee on Tuesday showed markets just what they can expect from the administration of President-elect Joe Biden: more of what they got under President Trump — at least for now.

What it means: Investors and big companies reaped the benefits of ultralow U.S. interest rates and low taxes for most of Trump's term as well as significant increases in government spending, even before the coronavirus pandemic.

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Investors made clear what companies they think will be winners and which will be losers in President Joe Biden's economy on Wednesday, selling out of gun makers, pot purveyors, private prison operators and payday lenders, and buying up gambling, gaming, beer stocks and Big Tech.

What happened: Private prison operator CoreCivic and private prison REIT Geo fell by 7.8% and 4.1%, respectively, while marijuana ETF MJ dropped 2% and payday lenders World Acceptance and EZCorp each fell by more than 1%.

Mike Allen, author of AM
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Biden-Harris, Day 1: What mattered most

President Joe Biden and first lady Dr. Jill Biden arrive at the North Portico of the White House. Photo: Alex Brandon-Pool/Getty Images

The Axios experts help you sort significance from symbolism. Here are the six Day 1 actions by President Biden that matter most.

Driving the news: Today, on his first full day, Biden translates his promise of a stronger federal response to the pandemic into action — starting with 10 executive orders and other directives, Caitlin Owens writes.