The next fiscal package out of Washington could total $3 trillion-$4 trillion and focus heavily on infrastructure, climate change, education and inequality, and investors should position their portfolios accordingly, says Bank of America.
A team of strategists led by Savita Subramanian said that investors stick with cyclical stocks, value stocks, small-and-mid-cap stocks, and stocks that will benefit from the explosion of capital expenditures that come out of the stimulus bill.
Industrials and metals are two sectors poised to be clear beneficiaries of the bill that will increase “picks & shovels” capex, BofA said.
The infrastructure plan will also be heavily focused on investments in greener public transit, EV charging stations, and energy efficient buildings. Bank of America sees industrials and materials as two sectors poised to gain from green spending. The firm also warned that commodities-driven companies may face headwinds unless they aggressively move towards greener goals.
The stimulus could boost US GDP up to 7% in 2021, and BofA likes GDP-sensitive cyclical stocks, small-caps and value stocks against the backdrop of a strong economic recovery.
However, more fiscal spending will likely lead to higher inflation as well, and energy and materials have historically been winners in periods of rising inflation, according to BofA data.
A survey conducted by Mizuho found that $40 billion of COVID-19 relief bill funds sent to Americans could go to bitcoin and stocks.
Mizuho analysts, led by Dan Dolev, spoke with approximately 235 people with a household income of $150,000 or less in a survey released on Monday.
The team found that roughly 40% of respondents said they planned on using at least a portion of their stimulus money to invest in bitcoin or stocks.
Mizuho calculated that this means nearly $40 billion of the $380 billion in stimulus checks could go to the assets.
The survey also found that investors are more likely to put their stimulus money into bitcoin than stocks.
Of the respondents who said they plan on investing, 61% said they would be investing in bitcoin versus just 39% who said they would be putting money into stocks.
“The survey predicts that bitcoin will account for 60% of total incremental investment spend,” Dan Dolev, Senior Equity Analyst for Mizuho wrote. “We calculate it could add as much as 2-3% to bitcoin’s current $1.1 trillion market value.”
Deutsche Bank’s chief global strategist expects stocks to pull back as much as 10% in the second quarter of 2021 as economic growth peaks.
In a Friday note a team of strategists led by Binky Chadha said they expect a “significant market consolidation” between 5%-10% sometime in the second quarter.
“The more front-loaded the impact of the stimulus, and the direct stimulus checks at around a quarter of the new package clearly are one off, the sharper the peak in growth is likely to be,” the strategists said. “The closer this peak in macro growth is to warmer weather (giving retail investors something else to do); and to an increased return to work at the office, the larger we expect the pullback to be.”
The strategists also raised their year-end S&P 500 price target to 4100, up from 3950 previously, because they see stocks rallying back after the second quarter pullback. That gives the benchmark index nearly 4% upside from current levels.
But investors should be selective about stocks they choose against this backdrop. Deutsche Bank’s top sectors are energy and financials, while industrials, materials, and cyclical consumers received a “neutral” rating, because these groups have already priced in strong macro growth after outperforming since November.
Meanwhile, returns on mega-cap growth stocks and technology names are likely to remain flat throughout the year, Deutsche Bank added.
Retail investors have poured into the stock market in the last year, lured by comission-free trading, work from home conditions, stimulus checks, and high savings rates. Now, Bank of America says that it is expecting the next round of federal stimulus aid to drive another surge in retail investing.
“We expect another uptick in retail activity with another round of stimulus, though the level will likely depend on the type of stimulus (broad based or targeted), the market backdrop at the time, as well as any potential regulatory changes discussed over the coming weeks,” a team of BofA analysts said in a recent note.
The firm found that the last two spikes in trading app downloads coincided with the receipt of stimulus checks. However, in both cases, there were extreme market moves (April 2020) and individual stock moves (January 2021) that helped draw investors.
If the next round of stimulus is broad based, BofA expects a higher level of retail activity, particularly as unemployment improves and many Americans are in better financial positions. President Joe Biden’s proposed $1.9 trillion stimulus plan includes $1,400 direct payments for individuals making up to $75,000 a year.
While BofA expects retail engagement to moderate throughout 2021 following the stimulus as people spend more time and money away from home, the bank still expects structurally higher levels of retail activity versus 2019 because of zero commissions, new entrants, and advances in technology.
In addition to a stimulus-boost, Bank of America’s data shows that the recent surge in retail trading has been led by young investors and social media.
Throughout 2020 and January 2021, brokerage firms E-Trade and TD Ameritrade saw a rising percentage of users aged 18-34, BofA said.
“It’s not just retail investors that may increasingly be a force in markets, its young retail investors,” BofA noted. “And while traditional news outlets did see a usage boost from the January surge in certain stocks, the boost was far bigger for Reddit, which tells you something about how these younger investors are obtaining views and information.”
Bank of America found that Robinhood daily average users reached 8 million, up from an average of 4.5 million, at the height of the GameStop market-mania in late January. At the same time, conversations on the WallStreetBets Reddit forum climbed dramatically.
While Robinhood usage has come down from its January highs, it still remains elevated relative to before the GameStop frenzy, indicating that retail activity is here to stay, BofA added.
Billionaire investor Sam Zell told CNBC on Tuesday an “awful lot” of US stimulus money was probably used to speculate in markets during the recent Reddit-driven frenzy, and said he hopes the next round of stimulus aid is directed towards “people who really need help.”
The Equity Group Investments founder said stimulus money that goes to “everybody,” including households with incomes north of $200,000 could lead to more speculation and risk-taking in the markets.
“What you’re doing is you’re just creating a whole bunch of surplus capital that’s floating around and everybody’s trying to figure out what to do with it, and isn’t this a fun way to gamble?” Zell said.
“And since it’s the government’s money, you didn’t have it before, you didn’t need it, why not roll the dice and see what happens?” he added.
Zell also said that the market speculation that occurred as investors piled into heavily shorted stocks in recent weeks is “very negative for the stock market,” and reminds him of the late 90s, when investor enthusiasm for highly speculative internet stocks eventually led to the dot-com bubble burst.
The investor said he hopes the next round of stimulus aid is directed towards “people who really need help.” Under President Joe Biden’s $1.9 trillion relief package, individual taxpayers making up to $75,000 and couples earning up $150,000 would receive direct stimulus checks of $1,400.
Zell added that outside of the transportation and hotel industries, the economy is in “great shape,” and he’s worried overstimulating the economy would result in the return of inflation.
The investor also voiced his concerns about over-exciting the US economy through issuing too much debt. A massive debt increase would dissipate the US dollar’s reserve currency status, which he called his “single greatest nightmare.”
Legendary investor Jeremy Grantham warned investors during a Bloomberg interview that the $1.9 trillion in federal aid President Joe Biden is seeking from Congress will further inflate the stock market bubble.
The GMO co-founder told Erik Schatzker that he has “no doubt” some of the stimulus aid will end up in the market. He said the “sad truth” about the last stimulus bill passed in 2020 was that it didn’t increase capital spending and didn’t increase real production, but it certainly flowed into stocks.
The plan that Biden is proposing contains a $1,400 boost to stimulus checks, robust state and local aid, and vaccine-distribution funds. Grantham said that if the package passed is worth $1.9 trillion, it could lead to the dangerous end of the bubble.
“If it’s as big as they talk about, this would be a very good making of a top for the market, just of the kind that the history books would enjoy,” said Grantham.
“We will have a few weeks of extra money and a few weeks of putting your last, desperate chips into the game, and then an even more spectacular bust,” he added.
Grantham has long-warned of the ballooning bubble he sees in the US stock market. In his investor outlook letter in the beginning of January, he detailed how extreme overvaluations, explosive price increases, frenzied issuance, and “hysterically speculative investor behavior” all demonstrate that the stock market is in a bubble that not even the Fed can stop from bursting.
“When you have reached this level of obvious super-enthusiasm, the bubble has always, without exception, broken in the next few months, not a few years,” Grantham told Bloomberg.
Grantham also said that the combination of fiscal stimulus and emergency Fed programs that helped inflate the bubble could increase inflation.
“If you think you live in a world where output doesn’t matter and you can just create paper, sooner or later you’re going to do the impossible, and that is bring back inflation,” Grantham said. “Interest rates are paper. Credit is paper. Real life is factories and workers and output, and we are not looking at increased output.”
He told investors to seek out stocks outside of US markets, as many other countries haven’t seen the huge bull market the US has. He called emerging markets stocks “handsomely priced.”
“You will not make a handsome 10- or 20-year return from U.S. growth stocks,” said Grantham. “If you could do emerging, low-growth and green, you might get the jackpot.”