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Could The Market Be In For A “Sharper Cyclical Rally”? One Analyst Thinks So

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Stocks could head higher in the near term. Here’s why.

Coronavirus cases in the U.S. have risen to more than 5.2 million, with deaths from the virus totaling more than 167,000. The Labor Department reported another 963,000 initial jobless claims and 15.5 million continuing claims for last week.

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And despite these massive figures, Democrats and Republicans have failed to come to an agreement on a new coronavirus relief bill, with the two sides at least $1 trillion apart on a package to aid the U.S. economy amid the ravages of the pandemic.

House Speaker Nancy Pelosi said this week that the two sides are “miles apart” on coming to an agreement, while Republican Senator Roy Blunt said that Treasury Secretary Steven Mnuchin said on a call with GOP senators that there hasn’t been “much new movement” in negotiations, with Blunt even suggesting that it could take until September 30—the deadline to fund the government—to pass more pandemic relief.

But even with the stalemate, one analyst says there’s upside ahead for the stocks that have so far been left out of the rally since the March lows.

“Improved fiscal package four negotiations, implied real rates plunging on anticipation of the Fed adopting inflation averaging, and decelerating COVID case growth, (and) hospitalizations all support Cyclicals and smaller caps,” said Evercore ISI’s Dennis DeBusschere.

For DeBusschere, he’s motivated by bad-news-is-good-news thinking. 

Central banks around the world are buying huge swathes of the bond market, leading to what DeBusschere calls “persistently negative real rates.”

And with bond yields so low, it takes less for investors to calculate riskier assets that offer a better return, and DeBusschere notes, the fall in the equity risk premium is happening at the same time as earnings growth is improving. 

Still, DeBusschere says fiscal support is necessary now. 

“A 10% unemployment rate and near record savings rate necessitates additional fiscal stimulus to offset the continuing economic drag from COVID,” DeBusschere said. “Otherwise, the recovery will be slow until a vaccine becomes available and widely distributed.”

But for now, the markets are still pricing in a new stimulus deal. However, DeBusschere added, “patience may wear thin if negotiations remain stalled through next week.”

However, it won’t be all bad news for stocks if a new stimulus deal fails to materialize in the near term. DeBusschere argues that mega-cap tech stocks that are benefitting from the work-from-home trend will continue to outperform.

If a stimulus package is passed, though, DeBusschere sees significant upside for energy and financials, and more muted upside for materials and industrials.

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