Jefferies Chief Market Strategist David Zervos is warming to U.S. equities once again.
Zervos has consistently been bullish on European and Japanese stocks as well as the U.S. dollar in 2015, but his latest commentary on the markets contains a “shout out to my long lost love, spoos,” a reference to S&P 500 futures.
Therein, he explained his innate penchant to be long U.S. equities, and what caused him to stray from the former apple of his eye:
It’s been over a year since we dropped our longstanding bullish spoo call. And I must say, I miss being bullish spoos! When I think of the epicenter of global entrepreneurial spirit, it is not in Europe, Japan or most certainly emerging markets—it’s in the U.S. The most robust capital markets are in the U.S. The most efficient capital markets are in the U.S. And strongest incentives to create real returns on capital are in the U.S. It has therefore been painful to leave U.S. equity capital markets out of the investment equation this past year. However, in retrospect, with all of the Fed miscommunication confusion surrounding the unwind of QE, I believe our short-term worries were well founded.
But the Federal Reserve has been able to successfully recalibrate its communications and lay the groundwork for the start of the tightening regime, removing Zervos’s primary source of consternation.
“The main reason we kind of stepped away from the U.S. after a very long commitment to the U.S. risk asset trade for nearly five years at Jefferies was the miscommunication risks from the Fed during the transition from QE to the unwind of QE,” the strategist said during an interview on Bloomberg TV.
“Now we’re coming to the rate liftoff, we’re going to reduce the uncertainty about it, and I think the Fed’s learned a lot of valuable lessons about communication,” he added. “And I think the markets learned a lot of valuable lessons about how to read the Fed.”
In his commentary, Zervos also offered a prediction for a headline we might see in mid-December:
Dare I even say that we could see the following red highlighted headline on Dec. 16 pass across our Bloomberg terminals:
(BN): “Fed raises rates for the first time on [sic] over 9 years, stocks hit record highs”
The only thing that would be better is adding a headline that gold drops below $1,000 for the first time since the summer of 2009.
While a stronger dollar will crimp earnings for large multinationals in the Standard & Poor’s 500-stock index, Zervos expects multiple expansion—driven by a shallow Fed hiking cycle and lower-than-typical interest rates—to more than offset this drag.