Why This Strategist Says The Stage Is Set For A Generational Opportunity In Stocks

Stocks may be down from their all-time highs set last month, one expert says unprecedented monetary support has set the stage for a “generational opportunity” for stocks. Here’s why.

The coronavirus has shifted a lot of things in 2020.

We all wear masks when we’re out in public. Hand sanitizer has become the hottest commodity. Most of us work from home, and our dogs love it. Look back fondly on your daily commute to the office? Neither do I. And we’re all now relieved when we can find toilet paper and flour at the grocery store when we’re running low.

One big shift: the unprecedented level of policy support for markets has also set the scene for a “generational opportunity” for stocks. That’s according to Patrick Spencer, vice chair of equities at Baird.

The market has been gripped by political developments ahead of the presidential election next month, and stocks have fluctuated as Democrats and Republicans debate another round of stimulus.

While Spencer noted that polls indicate a Democratic victory is more likely, he argues that stocks are set for a bullish period regardless of who wins the election.

Fed Chairman Jerome Powell, “irrespective of what he said (Wednesday)—and he is going to obviously maintain his $140 billion support in the market by buying bonds—but he has recently set the scene, for my mind, for a generational opportunity in equities,” Spencer said.

The Fed has deployed an unprecedented level of monetary stimulus to support markets since the coronavirus pandemic shutdown the U.S. back in March, and policymakers have repeatedly urged Congress to provide more fiscal support to boost the economy. 

The central bank slashed its benchmark rate to 0% to 0.25% on March 15, and has since vowed to keep monetary policy conditions accommodative until inflation returns to the Fed’s 2% target. What’s more, the Fed launched an open-ended bond-buying program involving the purchase of Treasurys and mortgage-backed securities, as well as measures to ensure credit markets run smoothly. 

Then in August, Powell said the Fed agreed to a policy of “average inflation targeting,” allowing the inflation rate to run “moderately” above its 2% goal for “some time.” The move to allow inflation to run hotter than normal was mad in an effort to better support the labor market and broader economy.

“He has basically said that he is prepared to run the economy hot,” Spencer said. “He is prepared to actually see until inflation gets over 2%, and he wants to see basically full employment.”

“Inflation hasn’t run over 2% for 10-odd years, so in my mind this is a generational opportunity for equities, and I think irrespective of who wins,” Spencer added.

Since the March bottom, stocks have outpaced the real economy notching record highs at the beginning of September, only to suffer a series of losses since led by the biggest tech stocks.

But Spencer argues that with a sharp rebound in GDP anticipated for the third quarter, low interest rates, and the market expecting a substantial improvement in corporate earnings, stocks look poised for short-term gains.

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