The fourth factor, more technical in nature, involved a substantial repositioning of investible funds into products with greater credit and duration risk. This included what Bloomberg reported as a record-breaking $12 billion inflow into exchange-traded funds tracking high-yield debt. The deployment of funds facilitated an increase in corporate bond sales. Investors even warmed to the issuance of once-maligned additional tier 1 bonds, which had one of its strongest months.
It’s not surprising then that an increasing number of analysts are expressing substantial confidence in the performance of markets and the global economy in 2024. After all, these factors have contributed to the rare favorable alignment of the three major market risks — interest rates, credit and liquidity — supporting virtually all asset classes. However, transforming what is desirable for the economy and markets into reality is not automatic, especially considering the economic, financial, political and geopolitical environment.
The obstacles policymakers will face in the “last mile” of their inflation challenge are uncertain. Some, including the OECD, have warned that it constitutes the most difficult part of the journey while others, such as Goldman Sachs Group Inc., have proclaimed it the easiest. Meanwhile, central bank specialists continue to struggle with such basic questions as what constitutes the equilibrium level of interest rates, or r-star.
As regards growth, the engines of the economy may sputter without further invigorating reforms, especially in the face of dwindling savings and other headwinds. Not enough is being done to fundamentally revamp productivity growth. Also, apart from the US, few countries have adopted measures that facilitate the transition to higher and more inclusive growth that respects the planet, including new public-private partnerships for the energy transition, and to oversee and advance artificial general intelligence and life sciences.
The incredible rally in asset prices will also need to navigate two other issues: high valuations that require early validation from both lower inflation and consistently robust growth; and questions about the continued ample availability of buyers to absorb significant new issuance, including from governments running large deficits and refinancing existing debt at considerably higher interest rates.
Paul McCulley, one of my former Pimco colleagues, often remarked along the lines that “you don't get to go to heaven twice for the same good deed.” The current extrapolation of a November to remember for investors may have a sense of this unless more is done to maintain this exceptional alignment of risk factors.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of “The Only Game in Town.”