US stocks have rebounded strongly since the March slide, while bond yields are deeply depressed, near near record lows, but in a recent analysis, Peter Berezin, chief global strategist at BCA Research, offers a simple explanation. , although dark. .
The coronavirus pandemic is expected to hit Main Street while leaving Wall Street relatively unharmed, writes Berezin, and asset prices reflect this scenario exactly.
“Bonds and industrials tend to reflect the outlook for the real economy (ie Main Street), while stocks reflect the outlook for corporate profits (ie Wall Street),” writes Berezin . “The two often move together, but sometimes they can diverge significantly.”
It is one of those occasions. As he points out, “the real economy is suffering”. Millions of people are unemployed and the most vulnerable in the economy have been hit the hardest.
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Despite this, stocks can continue to increase. The asset class is generally OK: “Technology and healthcare are the two biggest sectors of the S&P 500,” says Berezin.
“The former has benefited from the transition to digital commerce following the pandemic, while the latter is a highly defensive sector that has benefited from the great interest in new treatments for the disease.” The heavy weighting of technology relative to other affected sectors and industries, such as travel and banking, helps investors avoid distress.
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And in different sectors, some of the heavyweights kiss like bandits. Amazon.com Inc Stocks
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and Home Depot Inc.
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They are reaching record highs as consumers huddle, tidy up their homes and buy items to replace the experiences they would normally have in gyms, restaurants and entertainment.
In addition, growing businesses benefit from lower interest rates. “A drop in the discount rate increases the present value of a cash flow, the longer these cash flows are expected to last,” says Berezin.
As for bond yields, Berezin argues that ultra-low yields do not necessarily indicate weak economic growth in the future. Unlike some analysts, he is not convinced that the current recession has slowed the growth of the long-term trend, and writes that “if some physical stores are going to disappear, this was part of a long-term shift to an economy digital, a change that increased productivity levels, rather than reducing them. “
Bond investors are betting that central banks will keep interest rates at record levels, while fiscal stimulus could also boost demand from consumers and businesses.
And, writes Berezin, “equity investors expect a result in which fiscal policy is relaxed enough to ultimately restore full employment, while interest rates remain low well beyond this point to induce Le private sector wants to keep spending: a win-win combination “for actions”.
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