By Eva Ados, COO & Chief Investment Strategist
The US stimulus checks now commencing delivery, will generate confounding effects associated with countervailing forces. On the one hand a massive cash infusion piled on top of an already recovering economy will continue to stoke inflationary fears. Casualties to inflationary concerns include both bonds and equities, with the latter being punished for higher discount rates applied to distant cash flows. Offsetting market selling pressures associated with inflation (primarily by institutional investors), we are likely going to also experience a hearty infusion of retail (day traders) investors who will attempt to parlay their newfound largesse into a larger windfall. Past stimulus behavior provides a clear blueprint on retail buying behavior. Chief among their selections include a list of risky, (hyper growth) equity securities. And, investors who want to participate along with the herd can readily join popular investment chat boards and crowd into the same names (akin to Gamestop short squeeze, etc.). In the near term, we believe retail traders will triumph over institutional investors and help escalate equity prices. We realize that on any given day, potential selling pressures from nervous, interest sensitive institutional investors, can tip the balance toward massive reallocation. Regardless, retail investor flows will continue to exacerbate market volatility and focus on a relative handful of stock selections.
We believe the strongest gains will accrue to recently beat-up high flying growth stocks (including popular ADRs) with heavy concentrations in the Technology and Health Care sectors. Growth stock gains should dominate inflationary fears for much of next week, though interest rate spikes (especially among the price sensitive 10-year bond), could delay a tech recovery for an extended period of time.