While inflation worries have brought some investors on the edge of their seats in recent weeks, the ace equity strategist maintains that a tapering scare will only come after treasuries have sold off more and cyclical stocks have rallied higher from current levels.
With the US economy coming out of the pandemic strong, Chris Wood, Global head (equity strategy), Jefferies is sticking to his long on cyclicals stocks trade. While inflation worries have brought some investors on the edge of their seats in recent weeks, the ace equity strategist maintains that a tapering scare will only come after treasuries have sold off more and cyclical stocks have rallied higher from current levels. “In the meantime, there is no sign for now, in America at least, of the policy that could short circuit this dynamic; namely yield curve control,” Chris Wood said in his weekly GREED & fear newsletter.
Strong economic growth
The current economic cycle is unprecedented, with no past account of countries being locked down owing to a pandemic. This, Chris Wood said, is the reason why he remains of the view that the cyclical rebound will continue to surprise on the upside in terms of the pent-up demand potential. Further, the market veteran finds his views strengthened by the Joe Biden Administration passing the $1.9 trillion covid stimulus in March and announcing a $2.25 trillion infrastructure stimulus on the last day of the past quarter.
In the aftermath of the pandemic, the US economy has been going on strong, another reason why Wood continues to be bullish on cyclicals. US nonfarm payrolls increased by 916,000 in March. Services PMI surged to 63.7% in March, the highest level since the data series began in July 1997. “Economists’ continuing stampede to upgrade US economic forecasts in response to the stronger data reflects the growing realisation that this has been no ordinary downturn in the sense that it has been a supply shock mandated by governments,” Wood added. Such strong macroeconomic figures do not go well with the argument of a further sell-off in bonds as the private sector’s risk appetite will not come down under such an environment.
Household savings will be spent
Similarly, US households are also sitting on excess savings of $2.2 trillion as at the end of the last quarter, Wood highlighted. Data from the US Bureau of Economic Analysis showed that US households had, prior to the latest Covid stimulus, lost $530 billion in income and received $1.35 trillion in transfers. “All of the above creates a dynamic where GREED & fear’s base case remains that much of this money will be spent, as the psychological relief coming out of the pandemic as the vaccine rollout proceeds, triggers massive pent-up demand.”
The only risk to Chris Wood’s optimism, in his own view, is that US household savings appear to be very concentrated in the wealthier part of the population. Although, the equity strategist agrees that the inflation scare that is about to come with the re-opening of the economy is “the biggest inflation scare in America since the early 1980s”, he added that a tapering announcement will not commence until the end of this year with rate hikes beginning in early 2023 after the tapering process is completed.