In recent weeks global equity markets have wobbled as bond yields increases driven by consumption spending resumption and optimism of the COVID-19 vaccination rollout. With the business cycle improving, JPMorgan bank is expecting cyclical stocks to lead the market higher in the near- and long-term.
Investors considering cyclical stocks currently
The bank’s Asia ex-Japan equity research head James Sullivan said that more defensive names and cyclical stocks can continue rallying. Cyclicals are stocks of companies whose businesses tend to ride with the economic wave of recession and expansion such as energy, industrial, and finance sector stocks. On the other hand, defensive stocks include consumer staples and health care, and they offer consistent dividends and earnings despite the stock market conditions.
The recent wobble in stock markets fuelled concerns of higher inflation leaving investors worried that central banks could increase interest rates. Notably, higher interest rates tend to have knockdown effects on highly valued stocks. Fascinatingly, the interest rate fears accelerated market rotation with investors taking money from expensive growth and tech stocks and investing in cyclical stocks.
Despite stocks rebounding in recent sessions, analysts expect market conditions to continue showing volatility. Sullivan said that what has been seen is a sharp rebound in value, but there is the potential of a growth bounce due to the market move’s extremity. However, Wharton School finance professor, Jeremy Siegel said that the backdrop considerably supports consideration of trade over growth stocks and big tech plays.
Nasdaq rebound will not last for long
Siegel said that in the past nine months he has been bullish, and the current stock market is showing a way to go up. His prediction excludes Nasdaq, whose rebound says is likely to last a short while. Recently, Nasdaq returned to positive territory, with the index surging 3.6% on Tuesday. But, in the previous week, it was in correction territory. Most importantly, challenges related to high-interest rates and optimism around the reopening of the economy with vaccines rolling out will continue weighing on growth trades.
According to Siegel, the stocks will not perform badly as there won’t be a crash like the one witnessed in 2008/09. But for the next 12 months, outperformers will be non-tech stocks. Investors will opt for the value stocks because of their yields since interest rates are expected to continue rising on the long bond.
Rising bond yields responsible for recent stock market swings
Although figures don’t look concerning, there is a scare regarding possible inflation. This past week, US consumer prices, excluding food and fuels, were somehow lower than expectations. Yields are still negative despite the recent surge that impacted other markets. The ten-year US bond yield has dropped, and the trend seems to be upward. Inflation concerns are spinning around investment, but the recent stock market rotation has been driven recently by the rise in bond yields rather than inflation concerns.