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If there is one thing that investors have been quite consistent in recent years, it is to turn negative news into positive hope, since the main market fundamentals support buying pressure, more than the economic and business data justify a correction. I refer clearly to the liquidity bubble fostered by central banks, which recently had a boost with fiscal stimuli, which in practice end up indirectly putting more capital in the stock market, since fixed income remains without much room for profitability, derived low or even negative interest rates.
And it is with this mindset of indefectible optimism that 2021 began, turning the needle of pessimism derived from the probability of an increase in taxes and more regulation for the technological sector in the USA, in favour of the optimism of more liquidity in the system, mainly in the pocket of the citizens through tax incentives, which will ultimately benefit all companies, but with emphasis on small and medium-sized enterprises, since a gradual normalization of economic activity is also expected.
Therefore, the term of “reflation trade” appeared, which essentially favours small caps, namely those that will gain from an expected increase in prices due to greater purchasing power. Another sector that may benefit, even in the medium term, is the financial sector, since the market already anticipates an increase in interest rates, which would improve the operating margins of the sector, which may occur even without the reduction of the balance sheet of the FED.
On the other hand, the prospects for a reduction in extreme dovish sentiment may lead to a negative reaction, given that in recent years we have had the experience that investors like above all liquidity and low interest rates, above even the good performance of the Economy.
