There’s a uniquely bullish background for risk taking: Wells Fargo CIO

Wells Fargo Wealth & Investment Management’s CIO Darrell Cronk joined Yahoo Finance Live to discuss what investors should be looking for in the market

Video transcript

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ADAM SHAPIRO: Well, about 16 minutes to the final bell. And on our last call, we invite Darrell Cronk, CIO of Wells Fargo Wealth and Investment Management, to join the stream. Nice that you are here. And there are a few …

DARRELL CRONK: Many Thanks.

ADAM SHAPIRO: – things that are going on right now. And what I wanted to ask you about because a lot of us are afraid to buy at the top if there is a slump and we should maybe hold back, but there was a report from another institution that has the latest funds who have favourited The flow of funds was enormous in stock funds and mutual funds. So if I am a cautious investor, is this the tip I should hold back before jumping in?

DARRELL CRONK: That’s a good question. It is what is so prevalent in the world today. In fact, we believe that there is a uniquely bullish backdrop for risk taking right now. You just got this week alone, you’ve set the S&P to a new high. You have small cap stocks that are making new highs. EM sets a new high. You have a decade high in base metal. The inflation thresholds are close to a two-year high. Credit spreads are close to their pantyhose. You have now seen a rotation in value from growth for four months in a row, which is the longest streak we had in 2016.

When you look at it, you need to look for signs that you are in what is a top environment. And in fact the breadth is really expanding here. And it’s pretty strong. It sets new highs of all time. When you’ve got that strong breadth, history tells us you rarely, if ever, get to big tops and such an environment.

SEANA SMITH: So, Darrell, how do you position yourself on that note? Where do you see opportunities in this current environment?

DARRELL CRONK: That’s a great question, Seana. I think you need to look at small caps and emerging market stocks. Both have done very well over the past 90 days. In fact, small caps have outperformed the S&P by nearly 2,000 basis points, or 20%, over the past 90 days.

The story goes on

It’s the first time small caps and emerging markets have seen their 50-day and 200-day moving averages compared to large caps and, perhaps more importantly, compared to NASDAQ 100 and large cap tech. This has not happened since 2017. If it does, or if it has historically, it means longer tail and longer maturity for these types of assets like small cap stocks and emerging markets.

Within sectors, we still think you need to give priority to industry, finance, technology and – sorry – technology and consumer discretionary. In today’s environment, we would hide utilities, staples, and REITs.

ADAM SHAPIRO: But you also have – you have passed from unfavorable – or you have passed from unfavorable to most unfavorable. I think it was … Sorry, I want to make sure I’m doing it right. The energy has passed from unfavorable to neutral. And I love that phrase “worst.” It sounds like King George – worst of all. But the energy sector has been crushed. It’s down 28% in the past 52 weeks. Would I read a neutral as OK, not so risky with the call you made to invest in some energy stocks right now?

DARRELL CRONK: Yes, for the whole of 2020 we were that low – we had basically zeroed our exposure to energy, which was a great source of attribution in return for 2020. Everyone is talking about technical outperformance or discretionary outperformance. But honestly, if you avoided the sectors that looked terrible, like energy, you got tremendous use to the portfolios.

We believe that with the value rotation I mentioned, the dynamics will gradually change. Energy is on. It’s the best year in the sector so far. Some of this is a reversal to middle trade. The basics are still challenging there. In the fourth quarter, energy will show the strongest contraction of any gig sector.

So we have to see further improvements there, even though, as you know, I mentioned base metals in a decade high. It’s not just base metals. Agricultural raw materials are at a multi-year high. We are getting closer. Brent crude is $ 55. If you put a 6 in front of it, it will give tailwind to the energy sector. So we switched it to a kind of neutral or strategic weighting. We’re not ready to go at a totally cheap price just yet.

SEANA SMITH: Darrell, what about that growth compared to value trading? Because it looks like you’re missing out on an opportunity in everyone. And I mention this because of the Netflix earnings we released earlier this week. It’s been a very, very strong quarter for the company. This is a name that has seen tremendous outperformance over the last year and goes back even further. But do you still think there is reason to buy some of these names that led the 2020 rally? Do you still see opportunities there in the technology sector?

DARRELL CRONK: Yes very much. I think you want to kind of fade the software companies on the tech side and get into more hardware and places like Netflix where you can have broadband exposure and things like that. The reality is technology is where there is growth, right? And here is the sales growth. And capital always flows where there is growth.

So from an investor positioning perspective, you think that you want to limit that exposure. So you want to face the higher growth on one end, in places where top-page sales can grow, such as in the UK. B. in technology, as in discretion. But at the other end of the barbell, you have things like financials and industrials that offer deep value and, frankly, have underperformed over long periods of time. That strategy worked really well.

ADAM SHAPIRO: All right Darrell Cronk, CIO, Wells Fargo Wealth and Investment Management, thank you for your insight into the market.