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<ul><li>The US economic recovery can continue without fresh stimulus, but the lack of a near-term deal could rankle <keyword id="31671" type="CITY" weightage="100" keywordseo="markets">markets</keyword>, <keyword id="224982" type="PERSON" weightage="60" keywordseo="Seema-Shah">Seema Shah</keyword>, chief strategist at <keyword id="150901" type="COMPANY" weightage="60" keywordseo="Principal-Global-Investors">Principal Global Investors</keyword>, said Tuesday.</li><li>Passing another aid package would be a "bonus" to the <keyword id="34412" type="ORGANIZATION" weightage="60" keywordseo="economy">economy</keyword>, but its rebound "is less dependent on fiscal stimulus than we originally believed," Shah said in a virtual presentation.</li><li>Leftover Paycheck Protection Program funds and September's better-than-expected jump in retail spending suggests activity is improving healthily without fiscal support, she added.</li><li>Markets, on the other hand, largely expect another bill and "will inevitably be disappointed" if it doesn't arrive, Shah said.</li><li><a href="https://www.businessinsider.com/?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestutm_source=msn.com&amp;utm_medium=referral&amp;utm_content=msn-slideshow&amp;utm_campaign=bodyurl?utm_source=markets&amp;utm_medium=ingestts&amp;utm_medium=ingest">Visit the Business Insider homepage for more stories</a>.</li></ul>Wall Street will fell the burn more than Main Street should Congress fail to pass new stimulus, Seema Shah, chief strategist at Principal Global Investors, said Tuesday.Democrats and the White House have mere hours left to reach a deal on new relief spending before hitting House Speaker Nancy Pelosi's 48-hour deadline. The hastened talks come after three months of plodding negotiations and failure from both political parties to pass their own proposals. Experts ranging from famed economists to Federal Reserve officials have warned that a lack of fresh aid will curtail the US recovery.Shah, on the other hand, considers another aid package a "bonus" to the already rebounding economy. Investors have mostly priced in a new bill being passed by February, she added, and risk assets could face weakness should those hopes be dashed."If we don't get that additional stim package, the market will inevitably be disappointed," she said in a virtual presentation. "The US economy is less dependent on fiscal stimulus than we originally believed."Read more: <a href="https://www.businessinsider.com/investing-strategy-tips-beaten-down-stock-picks-todd-ahlsten-parnassus-2020-10">A fund manager who's doubling up the competition in 2020 tells us his strategy for investing in the 'K-shaped' economic recovery — and details the only 2 stocks he added as the market recovery took off</a>The strategist pointed to several indicators as signs of the rebound is robust than many believe. The Paycheck Protection Program expired at the end of July with $130 billion in unused funds, suggesting eligible small businesses took what they needed and have been able to stay solvent, Shah said.The unemployment rate, while still elevated, continues to trend lower. Retail sales <a href="https://www.businessinsider.com/us-retail-sales-beat-september-estimates-economic-recovery-coronavirus-recession-2020-10">jumped more than expected</a> in September, suggesting consumer spending trends remain healthy well after stimulus measures expired.Still, those calling the trend a V-shaped recovery are mistaken, according to Shah. While some monthly gauges such as purchasing managers' indexes showed a sharp increase after the March plunge, high-frequency indicators and metrics tracking industrial production do a better job at detailing the US recovery, she said. Activity remains well off its pre-pandemic peak and likely won't reach those levels until late 2021 or early 2022, she added."When you have a complete lockdown, invariably there's going to be a rebound," Shah said. "Unfortunately, a lot of those tailwinds have started to fade and it's an uphill battle now."Read more: <a href="https://www.businessinsider.com/investing-book-recommendations-11-picks-championship-contenders-reaping-big-returns-2020-10" target="_blank" rel="noopener">We spoke to 4 US Investing Championship contenders who raked in a combined return of 1,349% in just 9 months. Here are the 11 books they say transformed them into trading juggernauts.</a>Principal Global Investors suggests clients hold overweight positions in US stocks as risk appetites improve and activity trends higher. Tech giants including Facebook, Apple, Microsoft, and Netflix present "unique secular growth" as the pandemic accelerates digitization and work-from-home trends, <keyword id="9865042" type="UNKNOWN" weightage="60" keywordseo="todd-jablonski">Todd Jablonski</keyword>, the firm's chief investment officer, said.Some economic scarring will likely emerge next year as more companies default on debt, Shah warned. Still, everlasting policy support from the Federal Reserve and encouraging readings from economic indicators suggest the US is bouncing back well.Now read more markets coverage from Markets Insider and Business Insider:<a href="https://www.businessinsider.com/esg-stock-picks-to-buy-4-companies-leading-social-justice-2020-10">The head of sustainable investing at a $64 billion advisory firm shared with us 4 stocks that are leading the way as companies embrace the social-justice movement</a><a href="https://www.businessinsider.com/us-economy-outlook-double-dip-recession-without-stimulus-roubini-2020-10">The US could plunge into a double-dip recession without timely stimulus, 'Dr. Doom' economist Nouriel Roubini says</a><a href="https://markets.businessinsider.com/news/stocks/netflix-q3-earnings-preview-streaming-competition-subscriber-growth-revenue-cuties-2020-10-1029698265">'Stronger than ever': Here's what 4 Wall Street banks expect from Netflix's 3rd-quarter earnings report</a>

The economy will be just fine without more stimulus — but markets could sell off sharply, says one top strategist

<ul><li>Shifting portfolio allocations based on a US presidential election prediction can leave investors missing out from gains come November, <keyword id="1027164" type="PERSON" weightage="60" keywordseo="strategists">strategists</keyword> at <keyword id="150901" type="COMPANY" weightage="60" keywordseo="Principal-Global-Investors">Principal Global Investors</keyword> said in a note to clients.</li><li>The <a href="https://markets.businessinsider.com/index/s&amp;p_500_500">S&amp;P 500's</a> median price return since 1928 under Republican-controlled governments was 10.4%, while under Democrat-led governments it's 11.9%. </li><li>Investors buying in only during years when one specific party is in power leaves them losing out on "multi-years of annual returns," the team said.</li><li>Picking stocks based on one presidential candidate winning is "a dangerous strategy," as pre-election polls aren't perfect and a 2016-like upset could drive losses.</li><li>Divesting before election day is also ill-advised, they said, as 17 of the last 19 presidential election years featured the S&amp;P 500 posting positive returns.</li><li><a href="https://www.businessinsider.com/?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingestutm_source=msn.com&amp;utm_medium=referral&amp;utm_content=msn-slideshow&amp;utm_campaign=bodyurl?utm_source=markets&amp;utm_medium=ingestts&amp;utm_medium=ingest">Visit the Business Insider homepage for more stories</a>.</li></ul>Adjusting portfolios to benefit from one party winning the US presidential election is ill-advised and investors should simply stay the course, Principal Global Investors said in a recent note.The upcoming election is set to shake up <keyword id="31671" type="CITY" weightage="100" keywordseo="markets">markets</keyword> and shift strategies no matter who wins. Some analysts view a second Trump victory as a boon for financials and oil firms, while a Biden administration would likely boost green energy companies and utilities. Markets are currently pricing in Democrats' snagging control of the White House and Congress, but investors shouldn't pay such forecasts much mind, Principal said.For one, the team including Chief Strategist <keyword id="224982" type="PERSON" weightage="60" keywordseo="Seema-Shah">Seema Shah</keyword>, Portfolio Manager <keyword id="467866" type="PERSON" weightage="60" keywordseo="Binay-Chandgothia">Binay Chandgothia</keyword>, and Chief Investment Officer <keyword id="9865042" type="UNKNOWN" weightage="60" keywordseo="todd-jablonski">Todd Jablonski</keyword> see markets faring well no matter which party is in power. The <a href="https://markets.businessinsider.com/index/s&amp;p_500_500">S&amp;P 500's</a> median price return since 1928 under Republican-controlled governments is 10.4%, while under Democrat-led governments it's 11.9%. Split governments saw 10.4% gains."Had an investor only chosen to invest during years when one specific party were in full control, they would have lost out on multi-years of annual returns," the team wrote.Read more: <a href="https://www.businessinsider.com/tesla-stock-investing-bull-case-fund-manager-david-baron-interview-2020-9">David Baron's fund has returned 93% to investors in the last 12 months thanks to a Tesla bet 5 years ago. He told us why he thinks the electric-car behemoth has much further to run, despite its huge rally.</a>Positioning for a specific candidate to win ahead of November also makes for "a dangerous strategy," the firm said. Should election night mimic 2016's upset, investors believing in Biden's polling advantage could lose large sums of cash. An "active, long-term approach" is likely the best option for market participants, even those who may worry about one candidate and their policy platform, the team wrote.Though the race is still fairly unpredictable, investors can expect heightened volatility in the run-up to election day, the firm said. Markets will look to continuously reprice the odds of certain policies being enacted, and such swings can drive choppier price action. Yet pre-election volatility is usually short-lived and usually gives way to additional gains. The S&amp;P 500 notched positive returns in 17 of the last 19 presidential election years, the team highlighted.Investors should remain fully invested through November, they added. Trimming risk assets through 2020 "makes sense" for those wary of economic recovery risks and stretched valuations. But extremely loose monetary policy will continue to bolster markets for the foreseeable future, and no election-day result can shift the Federal Reserve's unprecedented relief efforts."While election-related noise may feel concerning, we do not believe that any of the potential election outcomes should be reason to go against these fundamental drivers of the market and significantly change portfolio allocations," the team said.Now read more markets coverage from Markets Insider and Business Insider:<a href="https://markets.businessinsider.com/news/stocks/kodak-stock-price-hedge-fund-buys-millions-shares-rally-stake-2020-9-1029552135">Kodak rockets 52% after hedge fund scoops up nearly 4 million shares</a><a href="https://markets.businessinsider.com/news/stocks/ant-group-ipo-tech-stock-sales-dot-com-bubble-record-2020-8-1029549532">Jack Ma's $30 billion Ant IPO could push tech fundraising to highest level since dot-com bubble's peak</a><a href="https://www.businessinsider.com/stocks-to-buy-25-owned-outperforming-women-fund-managers-gs-2020-9">GOLDMAN SACHS: Women portfolio managers are outperforming their male counterparts so far in 2020. These are the 25 stocks they own the most compared to men.</a>

Investors should avoid 'dangerous strategy' of positioning for US election outcome, top strategist says

<ul class="summary-list"><li>The recent tech sell-off is a "golden buying opportunity," according to Wedbush.</li><li>The midweek rout in tech stocks was partly triggered by Trump's hawkish comments about Taiwan.</li></ul>The sell-off in technology stocks represents a "golden buying opportunity" for investors, according to Wedbush analyst Dan Ives.The recent sell-off was partly sparked by former President Donald Trump's hawkish comments on Taiwan and the potential for more tariffs in <a target="_blank" class="" href="https://www.bloomberg.com/features/2024-trump-interview-transcript/">an interview</a> with Bloomberg Businessweek."They did take about 100% of our chip business. I think Taiwan should pay us for defense. You know, we're no different than an insurance company. Taiwan doesn't give us anything. Taiwan is 9,500 miles away. It's 68 miles away from China," Trump said."Taiwan took our chip business from us, I mean, how stupid are we? They took all of our chip business. They're immensely wealthy. And I don't think we're any different from an insurance policy. Why? Why are we doing this?" Trump asked.With polls and betting markets <a target="_blank" class="" href="https://www.businessinsider.com/trump-beating-biden-debate-polling-election-2024-7">recently moving in Trump's favor</a> for the November election, investors took Trump's comments seriously, with the Nasdaq 100 falling more than 3% since the interview was released. Chip stalwarts also sold off on reports that President Joe Biden's administration was readying a fresh round of restrictions on trade with China to limit its access to cutting-edge tech. But Ives said Trump's rhetoric can represent more bark than bite, and that the latest tech sell-off ultimately represents a great buying opportunity for long-term investors."This is all a game of high stakes poker for the Trump campaign and a shot across the bow against XI/Beijing," Ives wrote. "We believe the 'Trump trade' does not ruin the AI Revolution thesis and tech bull market and to some extent it's just a negotiation that will be a long and drawn out process."Semiconductor production won't be moving to the US in a significant way anytime soon — Taiwan produces about 92% of the world's advanced microchip supply. And with the global economy dependent on the silicon wafers that come out of Taiwan, <a target="_blank" class="" href="https://www.businessinsider.com/trump-taiwan-china-semiconductor-chips-us-economy-trade-biden-election-2024-7">it's not in the US' best interest to disrupt that by letting China take it over.</a>Principal Asset Management's Todd Jablonski said this tech sell-off is simply a small blip in the grand scheme of things."A possible Trump administration doesn't disrupt the forward momentum of big tech in the U.S. These types of market blips are common as we approach elections, and investors should be cautious in making moves based on these fluctuations," Jablonski said in a note on Thursday. What ultimately matters most for the price of tech stocks over the long-term is earnings, and that area is still a bright spot, according to Ives. "Our playbook continues to be own the AI Revolution thesis and winners on sell-offs like yesterday. We believe 2Q earnings will be a major positive catalyst for the tech sector and expect tech stocks to be up another 15% for the year adding to the robust tech gains in 1H2024 as now the broader tech growth story takes center stage," Ives said.

The rout in tech stocks is a 'golden buying opportunity' for investors, analyst says

<ul class="summary-list"><li>The <keyword id="6355253" type="UNKNOWN" weightage="60" keywordseo="federal-reserve">Federal Reserve</keyword>'s plan to let <keyword id="22195" type="COMPANY" weightage="60" keywordseo="Inflation">inflation</keyword> run hot could shake up decades-long regimes in <keyword id="31671" type="CITY" weightage="60" keywordseo="markets">markets</keyword> and the <keyword id="34412" type="ORGANIZATION" weightage="100" keywordseo="economy">economy</keyword>.</li><li>Higher inflation stands to lift cyclical assets and slam Treasurys and high-grade corporate bonds.</li><li>A period of steadily high inflation and strong growth could replace the past decade's weak expansion.</li></ul>Regime changes are usually identified years after they first emerge.LeBron James' decision to take his talents to South Beach kicked off <a href="https://www.espn.com/nba/insider/story/_/id/31058288/the-coastal-elite-status-nba-superstars-superteams">a new era</a> of NBA "superteams," assembled by friendly superstars coordinating their movements via free agency. Robert Downey, Jr.'s portrayal of Tony Stark, aka Iron Man, in 2008 set the stage for a new <a href="https://www.businessinsider.com/marvel-cinematic-universe-movies-ranked-by-worldwide-box-office-2019-4">box-office (and now streaming) behemoth</a>. And like it or not, Mark Zuckerberg's invention of Facebook brought a paradigm shift to online privacy and socialization.Federal Reserve Chair <keyword id="1727754" type="PERSON" weightage="60" keywordseo="Jerome-Powell">Jerome Powell</keyword> may be next up. Investors have been <a href="https://www.businessinsider.com/federal-reserve-treasury-yields-inflation-wall-street-outlook-powell-policy-2021-3">bracing for inflation</a> in the still-nascent Biden era. But how the <keyword id="45672" type="ORGANIZATION" weightage="60" keywordseo="Fed">Fed</keyword> guides the economy forward will decide whether markets are in the midst of their own regime change or if investors can reuse their pre-pandemic playbooks. It's looking for the moment like it could be the start of a new era in markets.The <keyword id="6358156" type="ORGANIZATION" weightage="60" keywordseo="central-bank">central bank</keyword> rolled out a new policy framework in August that targets inflation temporarily above 2% and maximum employment. Powell's comments since then signal the Fed's extremely easy monetary policy <a href="https://www.businessinsider.com/fed-powell-march-fomc-asset-purchases-central-bank-monetary-policy-2021-3">will stay in place</a> well after the economy reopens.The guidance, while vague, marks a stark shift from the recovery following the global financial crisis. The initial bounce out of the Great Recession quickly gave way to secular stagnation, a phase <a href="https://www.businessinsider.com/larry-summers-on-more-secular-stagnation-2015-10">coined by famous economist Larry Summers</a> to describe a period of weak growth and low inflation.The Fed's new strategy aims to learn from the last recovery and run the economy hot, bucking the decades-long precedent that explicitly links price growth with hiring."There was a time when there was a tight connection between unemployment and inflation. That time is long gone," Powell said in a Wednesday press conference. "We had low unemployment in 2018 and 2019 and the beginning of '20 without having troubling inflation at all."<h2>Laying a foundation for the next decade of gains</h2>Recession recoveries have similar market dynamics in their early stages. Investors dump defensive assets like Treasurys and growth stocks and move their cash into riskier vehicles in hopes that stronger economic growth will lift their value.Those trades have largely played out. Treasury yields <a href="https://markets.businessinsider.com/news/stocks/10-year-treasury-yield-climbs-30-year-2019-highs-fed-inflation-2021-3-1030225138">surged to their highest levels in more than a year</a> as investors positioned for stronger inflation. Tech stocks tumbled through February, and sectors that lagged through the pandemic outperformed.Recent weeks have been frothier. Tech sell-offs have been followed by dip-buying as traders moved their focus from inflation concerns to reopening optimism and back again. The 10-year yield continues to climb, but at a slower pace than seen earlier in March. Markets are seemingly at a crossroads, waiting to see just how strong the recovery ends up being."We're in the early stages of a regime change, where maybe the easy money has been made," <keyword id="9078153" type="UNKNOWN" weightage="60" keywordseo="rich-steinberg">Rich Steinberg</keyword>, chief market strategist at The Colony Group, told Insider. "I would love to tell you there is a playbook you could follow that's going to give you the secret sauce for how to be directionally correct throughout this move. I don't think that secret sauce exists."<div type="image" title="Growth vs Value" height="608" width="1234" msid="81617780" hostid="261"></div>To be sure, the change in market leadership has a way to go before reversing nearly a decade of growth dominance. Barring a short stint in 2015, such stocks handily outperformed their value counterparts after the financial crisis as the low-growth-low-inflation backdrop boosted their appeal.Aggressive fiscal stimulus and the Fed maintaining easy monetary policy stand to change that. The combination can supercharge economic growth and inflation to levels unseen through the late 2000s and 2010s, <keyword id="5528421" type="PERSON" weightage="60" keywordseo="Jason-Draho">Jason Draho</keyword>, head of asset allocation in the Americas at UBS, said in a note.Democrats' plan to <a href="https://www.businessinsider.com/democrats-infrastructure-package-jobs-bill-after-biden-stimulus-bipartisan-talks-2021-3">pass a massive infrastructure plan</a> should provide an even bigger boost to cyclical assets, as well as lift long-term productivity and economic growth, he added.If value stocks and recently unloved sectors become the market's new winners, the growth giants and Treasurys that thrived for more than a decade are likely to lose. Growth stocks' valuations are closely tied to interest rates, since investors project out the company's long-term expansion and use rates as a discounting tool. Higher rates cut into such firms' future profits and, in turn, their stock valuation.Higher inflation is also the "enemy of fixed income" and will likely drag on Treasurys, mortgages, and investment-grade corporate debt, Todd Jablonski, chief investment officer of Principal Global Asset Allocation, said."At the current level of low rates, what you're looking at in fixed income is a very expensive proposition for stability, and not as much income as one might like," he added.<div type="image" title="wall street gordon gekko michael douglas" height="805" width="1611" msid="81617782" hostid="261"></div><h2>A whole new world, or business as usual?</h2>It remains too early to tell whether the economy is entering a new expansionary cycle or starting the kind of regime change that only comes once every few decades, Jablonski told Insider.The last major regime change was arguably the dot-com boom of the late 1990s and early 2000s. The advent of the internet and a new wave of technology companies kickstarted the tech sector dominance seen up until today.Looking even further back, the "Great Inflation" that dominated the 1970s and ended with former Fed Chair Paul Volker's unprecedented rate hikes marked another momentous change. Retaliation to the high-rate environment materialized in the 1980s with new mindsets: profit rules all, trickle-down economics, and, as made famous by fictional financier Gordon Gekko, the philosophy that "greed is good."The kind of regime that materializes after the pandemic depends on just how much inflation the Fed is comfortable permitting, Jablonski said. The CIO said he expects price growth to crest at 3% during the recovery, but that surge is expected to quickly fade soon after.If there's enough momentum to drive "real, organic, privately led inflation" after that peak, the country may finally buck the low-growth-low-inflation era, Jablonski said."The question becomes, after this cresting ... where do we settle? Do we settle at 2.5%, or do we settle at 2%? There's an enormous difference between those numbers!" he added.The market's reaction won't come overnight. Asset classes that thrived in past regimes only started to decline well after relevant central banks lifted rates multiple times. The Fed's latest projections suggest its first post-pandemic rate hike won't arrive until after 2023, leaving plenty of time for the market to swing between regime-change positioning and a return to past year's norms.<div type="image" title="Colony Group Bubbles" height="1364" width="2330" msid="81617784" hostid="261"></div>Trying to time a regime shift and a bursting of the related bubble "is extremely difficult and can be extremely painful if you're on the wrong side of the trade," Colony Group's Steinberg said.While the change's timing is cloudy, it's growing more likely that the market is on the brink of a seismic shift, Draho said. Continued support from the Biden administration and the Fed could replace the lower-for-longer regime seen over the past decade with a push to run the economy hot. "What seemed improbable six months ago is becoming increasingly plausible and investors need to be prepared," Draho added.The key, for now, is composure. The Fed has said it will "<a href="https://www.businessinsider.com/fed-jerome-powell-inflation-patient-stimulus-treasury-yields-reopening-monetarypolicy-2021-3">be patient</a>" in waiting for inflation to crest and then settle at an elevated level before pulling back its historic monetary support. Investors might be tired of the central bank's ambiguity, but the balance between overheating the economy and repeating a phase of secular stagnation is a difficult one to strike."The Fed is the snail on the edge of a razor. And they're trying to be careful to live, to get through it, but also not to move too fast and get cut," Steinberg said.

How the Fed's plan to let inflation run hot could completely upend the way the market functions

<ul class="summary-list"><li>Jeffrey Gundlach, the CEO and chief investment officer of DoubleLine Capital, has a stark warning for investors with exposures to corporate credit.</li><li>The so-called Bond King notes increasing size, leverage ratios, and unrealistic ratings of investment-grade debt as reasons to ditch the securities before an economic downturn. </li><li>Gundlach thinks investors "should be playing defense right now."</li><li>His warnings match those put forth by other experts across Wall Street in 2019. They include Scott Mather of Pimco, Todd Jablonski of Principal Global Investors, and Raoul Pal of RealVision.</li><li><a href="https://www.businessinsider.com/prime">Click here for more BI Prime stories</a>.</li></ul>There's a reason why Jeffrey "<a href="https://www.businessinsider.com/category/jeffrey-gundlach">Bond King</a>" Gundlach's opinions are highly sought after within the investment community. The self-made billionaire CEO and chief investment officer of DoubleLine Capital has quite the resume.Not only is Gundlach known for his prescient market clairvoyance - the collapse of subprime housing bubble and the election of Donald Trump, to name a few of the more recents - he's also responsible for turning $0 to more than $150 billion assets under management in less than 10 years. It goes without saying that no one can accurately predict the future with consistency, but Gundlach seems to have a knack for nailing big calls."We are battling tooth and nail the next recession," Gundlach said in a <a href="https://finance.yahoo.com/video/bond-king-doubleline-founder-ceo-163202324.html" target="_blank" rel="noopener">recent interview</a> with Yahoo Finance. "The Fed has but done - and the central banks - everything they can to avert the next recession. But a recession will come."To Gundlach, it's only a matter of time before the US inevitably succumbs to a period of contraction. Global central banks can cut interest rates all they want. But in his mind, if the byproduct of that stimulus isn't tangible economic growth, then their efforts are for naught.Still, periods of contraction create opportunities for those who are positioned correctly - and Gundlach thinks he's spotted a corner of the market that he can take full advantage of when the next downturn sets in."The next opportunity is going to be in corporate credit," he said. "We have zombie companies that are allowed to keep going because of these artificially low interest rates - and the corporate bond market is probably significantly over-rated, which sounds a lot like subprime in 2006."He continued: "Some of them were rated triple-A, and they fell to 20 cents on the dollar."It's an argument Gundlach has made before. Back in May, at a media and client event in New York, he said the corporate-bond market would "<a href="https://www.businessinsider.com/next-recession-jeffrey-gundlach-on-corporate-debt-problems-2019-5" target="_blank" rel="noopener">really have problems</a>" once negative GDP was realized.Some of the world's foremost financial minds have also expressed worry in recent months. The lowest rung of investment grade credit - or BBB - was a hot topic of discussion at the <a href="https://www.businessinsider.com/category/milken-2019" target="_blank" rel="noopener">Milken Institute Global Conference</a>, which also took place in May."When those tip into junk, it'll be a mess," <a href="https://www.pimco.com/en-us/experts/scott-a-mather" target="_blank" rel="noopener">Scott Mather</a>, the chief investment officer of US core strategies at Pimco, told Business Insider about BBB-rated bonds. He lamented what he called the "<a href="https://www.businessinsider.com/next-recession-how-to-prepare-debt-market-risks-scott-mather-pimco-2019-5">riskiest corporate market we've ever had</a>."Todd Jablonski, the chief investment officer at Principal Global Investors, agreed."You'll eventually get some exogenous force that could disrupt the Fed and create additional pressure," Jablonski he Business Insider in May. "That would lead to default coming out of the high-yield space. We're underweight high-yield."<h2>Swollen corporate debt loads</h2>Today, corporate debt levels tip the scales at more than twice the size they were in 2006. The chart below depicts the explosive growth in corporate debt levels pre- and post-financial crisis.Swelling corporate debt piles alone wouldn't necessarily warrant cause for concern, but Gundlach thinks their ratings are way out of whack - and he named names."<a href="https://markets.businessinsider.com/stocks/t-stock">AT&amp;T</a> is one of them," he said. "Right now, there are leverage ratios in the investment-grade corporate bond market that suggest that nearly a third of the investment corporate bond market probably should be rated junk."Going beyond Gundlach and the others above, <a href="https://www.businessinsider.com/category/raoul-pal">Raoul Pal</a>, former hedge fund manager and <a href="https://www.realvision.com/tv/home">Real Vision's</a> outspoken CEO, has been warning of a corporate credit induced "<a href="https://www.businessinsider.com/raoul-pal-sees-corporate-debt-downgrades-upending-the-pension-system-2019-8">doom loop</a>" for months."When the recession comes, there won't be any idea of addressing these leverage ratios," he said. "You're going to see en masse downgradings of the investment grade corporate bond market - and trust me, when a triple-B rated bond gets dropped down to a single-B rating the price doesn't go up."If Gundlach and his colleagues are right, this will lead to a massive divestiture in corporate bonds. And for that reason, he thinks an investor's exposure to the space should be at an absolute minimum."That's why you should be playing defense right now," he concluded. "The fact that 2019 has been really good is just a better reason to play defense."

'A recession will come': Experts across Wall Street are warning of hiccups in a market that 'sounds a lot like subprime in 2006'

<div class="KonaFilter image-container display-table"><div><div class="image on-image">Getty Images / Scott Olson</div></div></div><ul class="summary-list"><li>A record portion of the investment-grade bond market is sitting just one step above junk status.</li><li>If the credit ratings of those companies fall at all, it would greatly increase their likelihood of default. And if a rash of firms default at once, it would put serious pressure on the market, possibly amplifying any imminent recession.</li><li>Experts at the recent Milken Institute Global Conference broke down their fears around the situation, which are hitting a fever pitch.</li><li><a href="https://www.businessinsider.com/?hprecirc-bullet" target="_blank" rel="noopener">Visit Business Insider's homepage for more stories.</a></li></ul>If you see a major corporate acquisition in the headlines today, there's a good chance it was financed by debt.That's because we're in the middle of a period marked by some of the easiest borrowing conditions in history. Rates have been near rock-bottom levels for the past decade, and companies have been wise to take advantage.But this seemingly unlimited spigot of capital has led to some potentially negative consequences. And the chorus of experts across Wall Street stressing caution has grown ever-louder.The focus of their worry is firmly placed on the companies that make up the <a href="https://www.businessinsider.com/category/investment-grade-debt" target="_blank" rel="noopener">investment-grade</a> section of the corporate bond market. While the debt held by those firms is considered relatively safe and at low risk of default, the group's overall quality has declined over time.Read more: <a href="https://www.businessinsider.com/softbank-vision-fund-predictions-for-10-year-future-rajeev-misra-2019-5" target="_blank" rel="noopener">'The disruptors will be disrupted': The man who runs the $100 billion SoftBank Vision Fund offers bold predictions for how different the world will look in 10 years</a>This can be seen by the unprecedented number of bonds sitting on the lowest rung of investment grade: BBB. As of right now, they make up the roughly 50% of the investment-grade market, the biggest share in history. In fact, their presence has doubled in size over the past 10 years.<div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image on-image"><a title_source="Nomura, based on BIS Quarterly Review data" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/5c94cd36dc67670d45468676-960/bonds.png"></a>Nomura, based on BIS Quarterly Review data</div></div></div>Since that debt is already sitting on the precipice of being labeled high-yield - or junk - it's especially vulnerable to any shift in market conditions that would make it more difficult to service debt. Whether that change is a simple economic slowdown or a full-blown recession, risks are mounting as the current cycle pushes further into its later stages.The potential fallout could be swift and punishing. Bonds clinging to their investment-grade status could see their ratings downgraded into junk territory. That, in turn, would make it harder for them to pay back their loans, and possibly even default. Once that happens, bankruptcy might not be too far off.This swelling portion of bottom-tier investment-grade bonds was actually a hot topic at the recent <a href="https://www.businessinsider.com/category/milken-2019" target="_blank" rel="noopener">Milken Institute Global Conference</a>. Whether it was during panel discussions or one-on-one interviews, Wall Street's foremost market experts were clearly perturbed by the developing - and potentially catastrophic - situation.Read more: <a href="https://www.businessinsider.com/milken-conference-2019-recap-overview-main-themes-from-investors-economists-2019-5" target="_blank" rel="noopener">The world's greatest investors and economists spent much of Milken dispelling 3 key misconceptions. Here's what they said to set the record straight.</a><a href="https://www.tcw.com/en/About_TCW/Our_Firm/Our_People/Bios/Bryan_Whalen" target="_blank" rel="noopener">Bryan Whalen</a>, group managing director of US fixed income at the TCW Group, told a panel audience that his biggest fear right now is the debt-to-growth imbalance he sees worldwide.He highlighted the current debt-to-global-GDP ratio of 220%. In the US, Whalen is focused on the debt-to-Ebitda ratio, which sits at a whopping 46%. According to his analysis, any time that ratio has exceeded 40% over the past 35 years, the high-yield corporate default rate spiked over 10% within 24 months."We see a solving of that imbalanced ratio not by growing our way out of it, but by writing down that debt," Whalen said. "Credit agreements look like Swiss cheese to us."Meanwhile, <a href="https://www.pimco.com/en-us/experts/scott-a-mather" target="_blank" rel="noopener">Scott Mather</a> - the chief investment officer of US core strategies at Pimco - had a much simpler take on the precarious situation facing the BBB class of bonds."When those tip into junk, it'll be a mess," he told Business Insider, lamenting the "<a href="https://www.businessinsider.com/next-recession-how-to-prepare-debt-market-risks-scott-mather-pimco-2019-5" target="_blank" rel="noopener">riskiest corporate market we've ever had</a>."Read more: <a href="https://www.businessinsider.com/next-recession-how-to-prepare-debt-market-risks-scott-mather-pimco-2019-5" target="_blank" rel="noopener">An investment chief overseeing $100 billion at Pimco says beware of the 'riskiest corporate market we've ever had' - and offers these strategies for surviving the next recession</a>So what could ultimately cause a mass exodus from BBB and into high yield? Answers at Milken were mixed, but one common response was some sort of major credit event.<a href="https://www.ssga.com/global/en/about-us/who-we-are/team.bio.64145919.html" target="_blank" rel="noopener">Lori Heinel</a>, the deputy chief investment officer of State Street Global Advisors, said the US market actually faced a huge risk recently."We <a href="https://www.businessinsider.com/pge-biggest-climate-change-bankruptcy-as-utility-files-for-chapter-11-2019-1" target="_blank" rel="noopener">dodged a bullet with PG&amp;E</a>, because they went from investment grade straight into bankruptcy, bypassing many steps," she told Business Insider. "That kind of large issuer credit event, by definition, could be destabilizing."She continued: "We don't believe there's any sort of systemic credit risk - there are no imminent debt cliffs - but if you get some sort of high-profile default, that could be something."Todd Jablonski, the chief investment officer at Principal Global Investors, agreed that it will take some sort of high-profile event to fully disrupt the bond market. He noted the swelling class of "zombie" companies that levered themselves to the gills when they could, and are now "dated and under assault.""You'll eventually get some exogenous force that could disrupt the Fed and create additional pressure," Jablonski told Business Insider. "That would lead to default coming out of the high-yield space. We're underweight high-yield."Read more: <a href="https://www.businessinsider.com/climate-change-investing-markets-are-unprepared-chris-ailman-calstrs-cio-2019-5" target="_blank" rel="noopener">The investment chief at America's 2nd-biggest pension fund warns markets are foolishly overlooking climate change - and paints a stark picture for the future</a>However, none of this directly addresses the elephant in the room: a possible recession. While recessionary cries have softened in recent weeks, it's still very much a tail-risk scenario for experts across Wall Street.But don't expect mass credit-rating downgrades to lead to a recession. If anything, the ticking time bomb in BBB bonds will exacerbate an economic meltdown, not cause one. After all, companies' ability to pay back the debt in question won't be affected until the economy is already slowing."Eyes wide open, these companies made the choice to increase their leverage levels, which is a different thing than us being hopelessly to indebtedness on an ongoing basis," <a href="https://en.wikipedia.org/wiki/D._Nathan_Sheets" target="_blank" rel="noopener">Nathan Sheets</a>, the chief economist at PGIM Fixed Income, told Business Insider.He continued: "That BBB downward ratings migration is more likely to be an amplification mechanism of a recession, rather than a driver of one." <div class="margin-top"> <h3>NOW WATCH: <a href="https://www.businessinsider.com/avengers-infinity-war-thanos-killed-half-all-life-earth-endangered-species-2019-4">There are 7.7 billion humans on Earth today. Here's what would actually happen if Thanos destroyed 50% of all life on the planet.</a></h3> <div> </div> </div>

The brightest minds on Wall Street say companies are sitting on a ticking time bomb that could spark a rash of bankruptcies - and make the next recession even worse

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