Stock indices of advanced economies rose on Wednesday, large ETFs investing in emerging markets saw moderate inflows on Tuesday. The speech of Janet Yellen who assumes the office of the US Treasury secretary affirmed that not only a short-sighted approach will continue in the US fiscal policy, but it may become even more pronounced. Yellen’s remark about the need to “act big” ignoring growing public debt issues was basically a signal that she, as a head of the Treasury, favors further debt accumulation as a remedy for short-term economic issues. It is clear that the US administration will float new measures to support the economy and the goal is to determine who will benefit from the spending spree.
The SPX has gained 13% since the US presidential election and during this leg of the bull market investors priced in both an early end pandemic, thanks to vaccine rollout, and economic rebound in 2021. However, as we enter in the actual phase of recovery market growth will be likely less uniform and investors will become pickier.
There are three reasons for that. First, there is a consensus taking shape that growth stocks are overbought: the gap in forward P/E for growth and value sharply widened in 2020 to the highest level in two decades, indicating that investors have accumulated the highest bias in stock preferences since the dotcom bubble:
Second, value stocks, which good part is cyclical stocks, are expected to thrive in the coming phase of higher economic growth with premium in their prices gradually dwindling. After unveiling the spending plan from the new administration, Goldman Sachs added 2 pp to the expected US GDP growth and forecasts it at 6.6% in 2021. NY Fed forecast currently implies GDP growth at 6.2% in 2021, with signs of acceleration since December 2020:
Markets probably haven’t priced in this momentum yet.
Third, policy moves from the new US administration should benefit the sectors that will drive economic growth and consumption in the future. This also implies more selective investor approach and a focus on firms and sectors that the government will favor. Biden’s plan for innovations includes increased investments in healthcare and green energy, including a move to electric vehicles, which should secure orders for companies such as GM, Ford and Tesla.
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