2 sectors will be ‘clear winners’ in the event of a sell-off following Biden’s $1.9 trillion stimulus plan, BofA says

Trader
Traders work during the closing bell at the New York Stock Exchange (NYSE) on March 18, 2020 at Wall Street in New York City


The stock market has largely priced in Washington’s $1.9 trillion stimulus plan already and investors should anticipate a “sell the news event” once the bill is passed, according to Bank of America.

A group of strategists led by Savita Subramanian said in a note Friday that cyclical stocks and small caps will be “clear winners” in the event of a stimulus-induced sell-off. 

Cyclical and small caps are highly GDP-sensitive and still trade at a steep discount, said BofA. In comparison, large-cap consumer discretionary and information technology stocks are priced to the downside.

Most of BofA’s indicators suggest that stocks are currently pricing in a lot of good news. For example, the ratio of the S&P 500 market capitalization and the M2 money supply is at its highest point since Feb 2020, and well above the post-financial crisis average as optimistic investors pile their cash into stocks.

According to the strategists, the ratio currently indicates that over $3 trillion in stimulus may already be priced in.

Bank of America also warned that stocks are currently pricing in a 1.4% yield on the 10-yr treasury. If that rate is to move up to 1.75% by the end of 2021, the long-standing “TINA” mantra that proposes “there is no alternative to equities” may be at risk.

Read the original article on Business Insider