This is the No. 1 risk to the stock market right now, according to Jim Bianco

·Executive Editor

Tue, Jan 4, 2022, 10:14 AM2 min read

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Market veteran Jim Bianco tells Yahoo Finance the Federal Reserve could break the back of the red-hot rally in stocks as it attempts to cool inflation with interest rate hikes.

"I think that is the number one risk right now in 2022," the president of Bianco Research said inside of DoubeLine's California headquarters where he will be presenting his key themes at the bond giant's annual Roundtable Prime event. [The risk] is that the high inflation rate is perceived to be persistent, which pushes the Fed hard to do something about it and in the process of doing something about it, it puts the rally of the stock market at risk."

To be sure, the broader stock market is in no way positioned for a potential Fed heavy hand.

The S&P 500 advanced a stellar 27% last year. Apple started the first trading day of 2022 by reaching the coveted $3 trillion market cap level for the first time. Tesla shares continue to be on fire, same with Ford in part fueled by money sloshing around in the markets chasing hot stocks.

Bulls are even using market history to support their bullish thesis.

Truist Advisory Services co-chief investment officer Keith Lerner found that going back to 1950, when the S&P 500 had a total return of at least 25% in a year, stocks usually rose in the following year. The outcome during that 71-year stretch: stocks advanced 82% of the time, or 14 out of 17 instances.

The average gain: 14%.

But Bianco is more cautious on risk, and justifiably so given the trading levels of stocks.

Adds Bianco, "My concern is the Fed makes a mistake. I think the market is concerned the Fed makes a mistake, too. Unfortunately the Fed is very good at one thing that they wouldn't like to be good at — that is they raise rates until they break something. That is a real fear in the market. They will start a rate hiking campaign this spring, and it will go through the rest of this year and there will be multiple rate hikes. When are they going to end? They will go too far and raise rates too much, and either the financial markets have a hiccup or the economy slips into recession or the plumbing of the financial system has a problem."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.