Yahoo Finance’s Brian Sozzi breaks down why reflation trade is dead.

Video Transcript

JULIE HYMAN: The reflation trade. That was supposed to be the big trade here of 2021. Here, we are. It's 2021. I don't know if that reflation trade is happening. Brian Sozzi, what do you think?

BRIAN SOZZI: No, it has slowly started to peter out, Julie and Myles. And what is the reflation trade? Our very own Brian Cheung has Yahoo U. I have Sozzi Decodes. So here are a couple of bullet points and what the reflation trade, in fact, is. It's simply a longer-term bet on the economy improving significantly in the back half of the year. And once you have that thesis down, you're really believing it, you want-- you would tend to buy cyclically focused stocks.

So in this case, what we've seen from December to January, is a real run up in small caps. Obviously, those are companies focused on the US and could benefit from the economy improving there greatly-- fiscal stimulus, vaccinations, you name it. Those companies would benefit first. Energy makers, energy companies, those companies would benefit-- and the financial sectors. And those were some of the hottest trades from December 1 to January 15. I have a piece on Yahoo Finance Now detailing some of these moves. But those were some of the biggest movers until now.

And over the past few sessions, you have seen a weakening or an outright decline in the Russell 2000. You've seen weakness in the XLE. You've seen weakness in the KBW Bank Index. And I think this is why here. One, you've seen a souring in economic data over the past couple of sessions, whether it's consumer confidence, you name it I would even say the GDP report this morning, 4% growth in the fourth quarter. That slightly missed estimates. So the GDP growth is starting to-- the overall economic growth is starting to slow down and put a hole in the thesis of a really strong second half recovery later this year.

You have a lot of concerns out there on Wall Street on whether this GameStop mania represents a market top. And if you are one to believe that, then you would probably take some profits in the reflation trade. And then the Fed-- you had the Fed come out yesterday. And I think Myles really sounded a note of caution on the recovery and where the economy is right now.

MYLES UDLAND: Yeah, and I think Powell did that in the context of being super doveish. Some of those inflation comments he made caught the markets by surprise. Just note, Sozzi-- as the market sees what's happening with the single stock names, all that craziness, reflation underway today. Financials, higher industrials--

BRIAN SOZZI: Of course.

MYLES UDLAND: [? --second-best ?] [? performance ?] expected in the S&P as well. It's the way it goes.

JULIE HYMAN: Airlines-- don't forget--

BRIAN SOZZI: Go figure.

JULIE HYMAN: --about airlines. They're getting-- they're getting a bid, too.

BRIAN SOZZI: Yeah, well, re-inflation. Re-inflation.

JULIE HYMAN: All right.