Chris Wood bullish on cyclical stocks; sees more stimulus from US Fed

Investors would be better off buying cyclical stocks whenever the market corrects, advises Christopher Wood, global head (equity strategy) at Jefferies in his weekly note, GREED & fear and cites two reasons for his conviction.

First, he believes that the world is nearer to the end of the Covid-19 pandemic now as opposed to a few months ago, in line with Farr’s law, which says that once peak infection is reached, then it will roughly follow the same symmetrical pattern on the downward slope – a bell curve. Second, Wood expects fears of any renewed downturn, as have begun to get reflected in the risk-off market sentiment in the recent days, will lead to further monetary and fiscal stimulus. This, in turn, should keep the liquidity tap flowing and support markets.

Over the past few days, however, global markets have corrected on the back of fear of re-lockdown across major economies as Covid-19 cases continue to rise. Recently, Prime Minister Boris Johnson announced a slew of coronavirus restrictions for England in the wake of a fresh spike in the number of Covid-19 infections. These new measures may last for six months, he said, if there is no improvement in the Covid-19 pandemic situation.

“Markets have become concerned that another US fiscal package will not be agreed before the November 3 election date. But if market action is bad enough, the politicians will still come together quickly since, as noted by Jefferies US chief economist, the unemployment insurance funds allocated by the executive order signed by Donald Trump on August 8 will be depleted by early October creating another 'fiscal cliff' in disposable income,” Wood said.

So while the consensus is not expecting any more US Fed action until the December Federal Open market Committee (FOMC) meeting, GREED & fear’s view is that there is a scope for US Fed action inter-meeting if the market action is violent enough. “Remember it is the US Fed which follows the markets, not the other way round. Still what triggers the US Fed to move is rising credit spreads. But so far the spread widening on US high-yield corporate bonds has not been that dramatic,” Wood said.

In its September 2020 meeting, the US Fed kept interest rates unchanged near zero and promised to keep them there until inflation was on track to “moderately exceed” the US central bank’s 2 per cent target.

Those at Credit Suisse Wealth Management, too, have expressed concern on the deteriorating health of the US economy. “We expect a significant deceleration in growth starting this month, as the surge related to the reopening of economies is fading and as household incomes are deteriorating after fiscal support measures in the US ran out in late July,” cautioned Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, in a September 15 note co-authored with Premal Kamdar.

As regards stimulus to boost the US economy post the election outcome is known in November, in case of Democratic candidate Joe Biden's victory, analysts at UBS estimate $700-800 billion of additional infrastructure spend and $0.9 - 1.1 trillion in healthcare and education spending over the next 10 years. Besides, they expect $75-125 billion in discretionary spending in 2021. On the other hand, in case Donald Trump returns to the White House, Niall MacLeod, a strategist at UBS sees $250-500 billion in additional infrastructure spend over the next 10 years and an extra $50 billion in discretionary spending in 2021.