The Delta coronavirus variant will hit the reflation trade in the casino-like stock market, says top analyst David Rosenberg

Trader on the floor of the New York Stock Exchange
US stocks are near record highs despite rising COVID-19 cases. Spencer Platt/Getty Images
  • Top analyst David Rosenberg recommended investors stay away from “reflation” stocks as Delta COVID-19 cases climb.
  • He told CNBC that rising cases and a reduction in fiscal stimulus will create headwinds for the US economy.
  • Rosenberg said the stock market has become like a casino, but the bond market tells the truth about the economy.
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The rise in Delta-variant coronavirus cases and a reduction in fiscal stimulus will weigh on the US economy over the next several months, leading market analyst David Rosenberg has said.

Rosenberg said on CNBC that investors should therefore stay away from the “reflation” stocks that tend to do better when the economy is stronger. Such reflation stocks have typically included banks and energy companies.

He also warned the equity market has become like a casino that is detached from economic reality.

“The on-again, off-again massive fiscal stimulus is in the rear-view mirror, and so we have that, and we have the question marks in front of the Delta variant,” he told CNBC’s “Trading Nation” on Friday. “It’s going to be a very challenging outlook for the economy in the next several months.”

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“You don’t have to basically abandon the stock market, but I definitely would not be in the value reflation cyclical trade,” said the analyst, who was Merrill Lynch’s most senior economist from 2002 to 2009 and is now the president of Rosenberg Research.

“I would be in the areas that are more, call it, defensive growth. That could be healthcare, consumer staples, could be utilities.”

The US registered a seven-day average of 79,763 new reported coronavirus cases on August 1, up from 32,068 two weeks earlier, according to New York Times data.

Rosenberg said that the stock-market has “frankly become a bit of a casino”, as the S&P 500 stands at around all-time highs despite a cloudy US economic outlook.

He highlighted the US’s second-quarter reading of gross domestic product, which missed expectations in late July. GDP rose at an annualized rate of 6.5%, compared with expectations of an 8.5% increase.

Rosenberg said the bond market is telling the truth about the economy, with yields down sharply from March highs as investors have priced in slower economic growth and inflation.

The yield on the key 10-year US Treasury note, which moves inversely to the price, has fallen to 1.234% from above 1.7% at the end of March. Investors tend to buy bonds and accept lower yields when they expect growth and inflation to be low.