Barita Insights: Weekly Newsletter January 18, 2021

Analyst Insights

With a US$1.9 trillion stimulus package announced by President-elect Joe Biden, the stock market fell against expectations. This mainly due to smart money investors worry about the potential for Biden’s rescue plan to be partially paid for through higher taxes. One thing is for certain the additional stimulus will create winners and losers in the stock market and the economy.

The US is getting US$4.8 trillion in stimulus including the $1.9 trillion package announced by President Biden. In addition to this, the US has received monetary stimulus in the form of quantitative easing from the 80% increase in the Federal Reserve’s balance sheet. Compared to the amount of stimulus needed at this point in rebounds from past recessions, this current package may be perceived as overabundance. However, None of the previous recessions had an engineered shutdown of major parts of the US economy, and that of some of its major trading partners. Let’s look at the numbers at similar points coming out of the three big recessions since the early 1980s, the federal-deficit-to-GDP ratio was only 2.7%-4.5%, while now it’s a huge 15%. In the last three recessions, monetary supply growth was 1.3%-9.5%, now it’s 25%. Historically, coming out of a recession, the 10-year treasury yield was 2.5%- 7.2%. while now it at approximately 1.1%.Treasury yields are currently at their highest levels since the start of the pandemic, an indication that investors are bullish that the economy is on a path of recovery, but also that inflation and stock market volatility could increase. The increase in treasury yields is likely driven by expectations that inflation will rise as a result of the new stimulus package. Let us look at some of the potential winners and losers given the new stimulus package.

Potential Losers
Biotech stocks are long-duration assets. The reason for this is that their earnings potential is derived from products coming to market years from now. These assets are values using a discount model using a discount rate, typically the 10-year yield. So as the 10-year yield rise, the discount rate rises, which reduces the present value of future earnings. Notable, this negative effect may be offset by the Biden administration expansion affordable care act. This will be positive for Biotech stocks as more people will have insurance.
Now people tend to run to gold in times of uncertainty but with the new stimulus, fears of recession will keep declining. This will likely temper the interest in the gold and gold exchange-traded funds and gold stocks.

Potential Winners
Biden did not offer much detail on his green-energy policy but has indicated it’s on its way. Once implemented, this may have a positive impact on green energy stock. The policy shift will favor companies in electric vehicles, battery storage, clean energy, hydrogen fuel and other companies of a similar nature. Companies such as Trane Technologies, First Solar and NXP Semiconductors may be in a position to benefit from an implementation of Biden’s green-energy policy.
Likewise, Biden did not offer much information on infrastructure spending but the new Democratic dominance in the senate raises the odds that this will happen. This would be good for construction material stocks like U.S. Concrete, Vulcan Material and Commercial Metals.

A lot of spending has been done on COVID which is warranted given the economic downturn caused by this pandemic, but we cannot dismiss the potential risk Biden plan carries for markets. There is a lot of money in circulation which could spark inflation and future Fed interest rate hikes but considering that prior rounds of fiscal stimulus have already been injected into the economy and the U.S. still has a really low inflation should help to dampen investor’s anticipation of inflation spiking. Instead, investors should direct their attention to positioning themselves to benefit from potential winners or rebalance their portfolios to manage potential losers.

 

Written by Jonathan Cook, Research Analyst

Conclusions

Top 5 things to watch in the Global Markets in the week ahead:

  1. Biden’s Inauguration: Joe Biden’s inauguration is set for Wednesday January 20.
  2. U.S. Housing Data: Housing starts and expected home sales will be released and the market consensus expects strong figures supported by record low mortgage rates
  3. Earnings: Earnings Data for Q4 is underway with big names like Bank of America, Goldman Sachs, Netflix, Intel, IBM, Procter and Gamble, United Airlines and Charles Schwab set to release. According to data
  4. ECB Meeting: The ECB is set to hold its first meeting of 2021 on Thursday
  5. PMI Data: The first PMI data of 2021 from the U.S., euro zone, UK and Japan are set to be released on Friday

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