The best trade idea of 2015 may be to buy stocks that benefit from a stronger U.S. consumer while shunning investments that have gained from monetary stimulus. In other words: Buy Main Street, sell Wall Street.
That’s the message from Michael Hartnett, chief investment strategist of Bank of America Merrill Lynch in New York, who says companies that cater to consumers stand to benefit as gasoline prices decline, freeing up cash to spend.
“Current tailwinds for the U.S. consumer are strong, certainly the strongest in eight years,” Hartnett said in a Dec. 15 report that cited rising payrolls, shrinking unemployment, low mortgage rates, advancing home prices and a 50 percent drop in gasoline prices since June as good for consumer spending.
“No wonder stocks like Cracker Barrel and other ‘low income’ retailers are currently rising,” he said. “Another Main Street versus Wall Street trade would be long regional bank versus Wall Street banks.”
Additional “Wall Street” investments include anything related to the boom in U.S. shale drilling, which benefited from the Federal Reserve’s monetary stimulus after the 1998 financial crisis. Those investments are suffering as oil prices have fallen about 50 percent from a June peak on weakening global demand and the highest U.S. crude output since 1983.
“We continue to forecast rotation to large from small cap, following the unambiguous fixed income rotation from high-yield to investment-grade in recent months,” Hartnett said.
Bubble 2.0
He also recommends investors be prepared for a repeat of 1999, when markets rose after central banks flooded the global financial system with money to cope with Russia’s debt default in August 1998. That cash found its way into tech stocks, pushing them into bubble territory.
“As shown in 1998, global credit problems have a habit of causing central bank easing,” Hartnett said. “The liquidity created to alleviate a deleveraging event will go somewhere, and normally it is to the sector with the best growth ‘certainty.’”
U.S. technology and healthcare stocks have the best growth certainty, Hartnett said. “Come spring, we believe long tech, short utilities will look very attractive.”
Oil prices may get a boost if the Organization of the Petroleum Exporting Countries agrees to cut production before its June meeting, according to another analyst.
“The fact that the next OPEC meeting is in June does not matter. They could cut in February,” Michael Breard, an energy industry analyst at Hodges Capital Management, according to a report by MarketWatch.
He told the website that West Texas Intermediate oil will rebound to $75 a barrel from about $55 currently, while North Sea Brent will rise to $85 from $60. Crude prices will find support as U.S. shale-oil companies cut back on production.
“The lower the price gets, the faster companies will lay down rigs, and the sooner it will be corrected,” Breard told MarketWatch.
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