Wall Street continues to remain in the firm control of bulls, with Dow Jones hitting a fresh all-time high on Wednesday after S&P 500 achieved the same feat last week. Global equity market strategist Chris Wood believes that bulls could continue to assert control on Wall Street, helped by the US Fed and a cyclical economic recovery. “The combination of an easy Fed and cyclical recovery continues to be bullish for equities despite the selling pressure triggered by talk of a significant increase in the capital gains tax,” the global head (equity strategy) at Jefferies wrote in his weekly GREED & fear newsletter.
Dow Jones has now surged a massive 78% from March 2020 lows, while S&P 500 is up 81%, and NASDAQ has zoomed 97% in the same time frame. Chris Wood said that the US Federal Reserve has continued to maintain its stance despite evidence emerging in favour of rising input prices, reflecting both restrained supply and pent up demand. “Still the American central bank continues to view these price pressures as transitory, driven by the exceptional circumstances created by an economic reopening after a pandemic, rather than as a signal of a fundamental trend change,” he added. US Fed has held rates near zero.
Chris Wood added that the support for US stocks is not just fundamental, even on the technical charts. He highlighted that the number of S&P 500 stocks trading above their 200-day moving average rose to 488 on April 21 or 97% of the total, the highest level since at least 1990, and is now 476 or 95% of the total. “This is certainly not bearish and signals a broadening out of the bull market, which is only to be expected in the context of what is likely to prove the strongest cyclical recovery in America since 1950 with the consensus now forecasting 12.2% YoY real GDP growth in 2Q21,” he said.
In terms of near term fears, the ace market strategist sees tapering scare as a possible catalyst for a market correction. “GREED & fear repeats the point that, if there is to be a real correction in stocks, it is most likely to be triggered by a tapering scare,” he said. However, Chris Wood believes for this to happen there needs to be a further sell-off in the Treasury bond market and a more rally in cyclical stocks.