Economics and Strategy
Accommodation and Liquidity Driving Rotation and Even Some Inflation
Jefferies’ U.S. and European economists are in agreement that monetary policy is accommodative, that an easing of trade tensions is likely to help growth going forward, and that fiscal spending through infrastructure programs could become a bigger focus in 2020. One of the main themes espoused by the European Economics team is the potential for the Euro area to surprise to the upside in 2020—they argue that the euro area is not following in Japan’s footsteps. With the uncertainty of the UK election now in the past, David Owen, Chief European Economist, expects to see evidence of pent up demand, at least for a period. The 2020 U.S. election is a risk factor, though Christopher Wood, Head of Global Equity Strategy, has been expecting a Trump victory, just as he had been expecting a trade deal partly because of Trump’s desire to get reelected.
These bullish economic factors play into Jefferies’ strategy views, which are generally constructive for the year ahead—David Zervos, Chief Market Strategist, recently went back in on his long S&P trade after the big run in the first half in 2019 caused him to take profits in the summer. Additionally, Christopher Wood believes the Fed’s purchase of $60 billion in short-term Treasury Bills per month supports a risk-on position. Sean Darby, Global Equity Strategist, is bullish on risk assets and, within the S&P 500, most prefers some of the more cyclical sectors, namely energy, financials, industrials and materials. Central bank easing, fiscal loosening by China and India have Sean bullish on Asia ex-Japan, and the aforementioned caused Sean to upgrade Japan to bullish in early November. Also in the pro-cyclical camp is U.S. Equity Strategist, Steven DeSanctis, who has been expressing a preference for small caps and for value over growth during the last several months.
Indeed, the expectation for better growth and a backdrop of accommodative policy from key central banks has many Jefferies strategists calling for another important shift in 2020—a modest pickup in inflation. David Zervos continues to recommend a long position in Treasuries as a hedge to his S&P position, but the liquidity that the Fed has added to the system may act to steepen the curve. With the Fed Funds rate remaining low, his interest is in being long the 2-year Treasury, whereas in the first part of 2019, his long position was in the 10-year. David believes the Fed could take another step toward inflation targeting and potentially aim for an overshoot on the 2% bogey, but that’s unlikely to happen before the 2020 election.
Interestingly, past bouts of higher prices have often been associated with higher oil, and yet until very recently the energy sector had been all but dropped from equity market conversation. Christopher Wood, however, suggests ignoring energy at this juncture is a bad idea. He believes the price of oil can spike significantly higher if all three of his assumptions around oil turn out to be true—namely that emerging market consumption will continue to rise, the growth rate in U.S. shale has peaked and the conventional oil industry will continue to reduce investment. Long-term market concerns about the longevity of the fossil fuel era may actually contribute to the shorter term opportunity in energy.