Even though cyclical sector stocks have recently corrected from highs on Wall Street, Jefferies’ global head of equity strategy Christopher Wood is not giving up on the trade. In his weekly note Greed & Fear, Chris Wood said that the cyclical trade has seen a “bit of a pullback” as US energy stocks came down 11% last week from the recent peak, and copper stocks slipped 13%. “This, in GREED & fear’s view, is nothing more than profit-taking as the end of the quarter approaches after the big price gains recorded,” the equity strategist said.
Add more on dips
The S&P 500 Energy index has slipped nearly 7% from recent highs. However, the index doubled since late October to the recent peak on 11 March and was up 136% from the March 2020 low. Copper stocks surged by over four times from March 2020 lows. “For such reasons, GREED & fear views the pullback as a buying opportunity to add to cyclical exposure,” Chris Wood said.
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Marquee energy stocks in the US have still given strong returns so far this year. Exxon Mobil is up 36% since January, Chevron is up 21.42%, Royal Dutch Shell is up 17.79%, and General Electric stocks have surged 21.57% in the same time period.
Chris Wood highlighted that his ‘back to normal trade’, which backs cyclicals such as Ryanair against stocks like Zoom, is still making money. “Ryanair has outperformed Zoom by 46% since the pair trade was introduced,” he added. Although Wood agreed that the slow vaccine roll-out in Europe is hurting the trade but maintains optimism around vaccination drives globally.
Focus to shift on next stimulus round
In the coming week, Chris Wood believes that the focus will once again shift back on the scale of the Biden administration’s pending infrastructure stimulus. Reports last week claimed that the next round of stimulus could be near $3 trillion. “Coming weeks will see growing discussion on the tactics employed to get this package through Congress as well as how much will be paid for by increased taxation,” he added. Wood believes an increase in corporate tax to be inevitable.