By William Gray
Astra Group, Investment Assistant
As the week gets underway, 160 million households in America will receive the first of their tranches of fiscal stimulus which is being rolled out to a majority across the country. The $1400 checks are being given to those who are still out of work in addition to individuals who’s earning power is under $75,000. In contrast with the first couple of stimulus checks this round will reach more ‘qualifying dependents’ such as adults with disabilities, college students and grandparents. This massive influx of money is designed to lift all states’ spending in order to boost economic output and encourage growth.
As this round of stimulus checks reaches a wider proportion of the electorate, some of which will not necessarily be in dire need of this tranche, it is likely that this money will find its way into the markets boosting cyclical stocks and potentially growth stocks. As the Nasdaq reached all-time highs last month, it has since been on a downward trend, however over the past week it has staged a miraculous recovery as inflation worries eased and bond yields settled.
Financial data provided by Refinitiv Eikon
The S&P500 also lost some ground as the market underwent a correction over the past month, however it has since regained its losses posting new highs at the end of last week. Lofty tech valuations and rising bonds have sprouted concerns over the sector as investors continue to shift into energy and other industries with attractive valuations ripe to benefit from the ceasing of Covid-19 restrictions. This new allocation has seen the US energy sector post massive gains over the past months as investors have turned their attention to seeking out value and cyclical stocks.
How far can this rally last though? There is only so far that doubling oil prices and supply issues can lift energy stocks up; the sector has fallen out of favour with a majority of investors seeking to invest in a responsible way, however this has been one of the highest performing sectors of the market since late last year with the S&P energy sector hitting pre-pandemic levels. The main reason behind the vast increase in energy prices stems from a predetermined thought that oil will be in greater demand as the pandemic restrictions lift, however, we will just have to wait and see whether these prices are justified.
As we look forward to the Feds meeting on the 16th and 17th of March, topics such as rising yields, inflation rate and economic stability will be hotly discussed and the outcomes and comments from these meetings will be widely anticipated by the market. Comments by the Fed in the middle of the week could calm the volatility which the market has been faced with over the past month, and investors will be eagerly awaiting comments from Chairman Powell on these topics.
It is unclear how long value and energy stocks can outperform growth on the notion of the reopening trade boosting consumer confidence, nevertheless it is clear that investors are moving away from the high valued darlings of the market in search of better cyclical opportunities. If oil companies do not drill excessively, then this will instil confidence that an oversupply of crude will not rapidly arise thereby meaning that the surge in oil prices and energy stocks will not be a short-lived cycle. The rally of oil stocks could also be helped by the Biden administration and their efforts to keep supply to a steady level through drilling regulations which are likely to be aggressively imposed. This would support confidence and cause commodities such as crude to rally further into 2021.