Biden's win may signal a major shift in the stock market. According to JP Morgan analysts, expect a comeback of the equity market. These are the stocks left behind by the growth stock market rally. If the Dems win, there is a strong possibility that value stocks will overcome growth stocks.
In a note Monday, JP Morgan strategists are warming up to a change in leadership. Along with analysts from other firms are emphasizing their preference for growth. Democrat nominee Joe Biden holds a widening lead over the incumbent President. As such, analysts would like to see change coming to the stock market.
The analysts’ main concern is that most have gone for growth stocks during the pandemic. They come at the expense of value stocks, or cheaper equities that trade at a lower price. As growth stocks (like tech) kept climbing, investors get pulled in. In the process, companies with stable earnings got ignored during the pandemic. At the same time, European stocks “have gone nowhere” during the same four months.
JPMorgan strategist Mislav Matejka sees the changes after the elections. “We need to get through U.S. elections event-risk first, but there could be a broadening in styles and in regional performances thereafter. A potential Biden victory should not be seen as a negative for markets, and could in fact lead to internal rotation.”
Last September, the nightmare analysts predicted started. Investors holding mega-cap technology stocks started selling off their holdings. This prompted the worst drop in Nasdaq since March and affected the other indexes as well. Current tech stocks valuations pushed some investors to go for Euro stocks instead.
Goldman Sachs Group Inc. strategists agree with JP Morgan. Analysts said that a Democrat win would bring back a return to value. This includes European cyclical, value, China-exposed stocks, and renewables.
The JP Morgan group favors long positions in defensive and growth sectors. This includes healthcare, tech, staples, and utilities. They did so at the expense of financials, consumer discretionary, and energy.
After the elections, analysts are considering shifting their priorities. They factored in possible new stimulus and a coronavirus vaccine within the year. If a vaccine comes out this year, expect value stocks to rise higher. If the dollar strengthens and Treasury yields rise, value stocks would bloom.
Speaking on Bloomberg TV, Matejka said “If Biden wins, the dollar could be potentially lower.” He said that “bond yields…stuck completely in a range for the last six months — and that was one big impediment to the rotation…could start to grind higher.” He said that the economy might receive “potential further fiscal stimulus.” If that happens, a reduction in trade uncertainty can happen. Matejka added it “would be a good enough starting point for these extreme markets to start to broaden out.” An increase in bond yields can help prop up bank stocks and the European market.
A Value Scenario
JP Morgan dismisses the notion that Biden’s victory will lead to higher corporate taxes. Dem strategists said that due to the current economy, Biden will revisit his plans. they said he will focus on business recovery and job growth.
Matejka believes that Biden’s tax proposals came “in a very different world without the virus.” Even if Biden delivers on his tax increases, he would water it down.
If the elections conclude drama-free, the uncertainty factor hounding the market will disappear. JP Morgan does not recommend giving up on tech stocks though. It noted that growth stocks have buyback support. As such, relative valuations still look undemanding,” the JPMorgan note said.
Watch this as Bloomberg reports on why JPMorgan says a Biden win could lead to a stock market shift:
Investors of the Capitalist, do you prefer value stocks over growth stocks? Or do you play both sides and hope for the best of both worlds? Share with us your stock preferences and strategies by leaving your comments below.