Stocks are flat today in yet another lackluster trading session. The market hinted at an upside breakout following the Georgia runoffs last week, but now, equities appear to be stalling due to a lack of positive headlines.
That has analysts expecting a rotation back into growth stocks, which Wall Street once said was the “most overcrowded” sector in the Bank of America December Fund Managers Survey. With the Democrats in control, however, investors are continuing to pivot out of value shares.
“There has been a short-term tone shift in the market,” explained Gregory Faranello, head of U.S. rates at AmeriVet Securities.
“Markets have shifted in mindset as the Democratic ripple is digested short-term. The focus now turning to growth and inflation and perhaps a combination of both.”
Rising Covid-19 infections are making “stay-at-home” stocks – most of which are growth – look more attractive, too. Deeper lockdowns in the U.K. caused Bank of America strategists to downgrade their 2021 GDP growth estimates for the country. They now predict only 3.1% GDP growth, down from 4.7% before the lockdowns were put into effect. The E.U.’s 2021 GDP growth was revised lower as well.
Bank of America says that the U.S. is far less susceptible to a GDP growth crunch of that size, thanks to the last two stimulus packages.
But that doesn’t mean there isn’t still lingering uncertainty for American productivity, especially in Q1 when corporations are set to report their Q4 2020 earnings. The December jobs report wasn’t a good one, and holiday revenues may end up disappointing bulls.
With more stimulus coming, though, any short-term economic concerns should get flattened out by a heavy dose of “helicopter money.” The market assumes $2,000 checks will soon arrive in qualifying bank accounts across the U.S.
What’s more, Biden – if he sticks to his campaign promises – plans to spend $5 trillion over the next 10 years on infrastructure and climate policies. That too should bring some short-term optimism.
The majority of that spending will also likely be front-loaded, meaning that a fiscal policy-driven spike in interest rates could emerge in the near future.
And, if investors have learned anything over the last few years, it’s that stocks can’t function in an environment with rising rates. Fed Chairman Jerome Powell attempted to heroically induce quantitative tightening by raising interest rates in late 2018, only to watch the market plummet in response.
President Trump berated him for doing so. So did Wall Street, Main Street, and everyone in between.
Powell deserves credit for even attempting it, though, as the decision to do so was likely the right move for the U.S.’s long-term economic health. No central bank chief had tried to shut off the quantitative easing “firehose” of liquidity at that point, nor have they even hinted at raising rates ever since.
The problem is that nobody wants to be the “bad guy” who slows things down and brings the economic cycle to a close. Pre-Financial Crisis, the Fed did this with regularity. The U.S. economy would start to overheat, and the Fed would then raise rates to keep inflation in check while easing America into an inevitable recession.
But since 2009, the U.S. hasn’t exhibited its typical warning signs of an overcooked economy. Inflation hasn’t been much of an issue and it wasn’t until 2017 that we witnessed a significant drop in unemployment.
In 2021, however, alarm bells could finally start ringing as massive stimulus and bond-buying programs take their toll. If the economic cycle finally ends this year, it will do so kicking and screaming, instead of being let down carefully by a watchful Fed.
Short-term, nobody wants to talk about it. And really, investors shouldn’t be concerned until stocks start to crumble. But once it begins, a quick market-wide rout could ensue.
All while inflation hedges like gold and Bitcoin – the only assets that seem capable of surviving another major crash – potentially hit new all-time highs.
By: Michael James
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