Lack of a stimulus deal ‘a real risk’ to the markets: Strategist
Darrell Cronk, president of the Wells Fargo Investment Institute, breaks down the latest market action with Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Jared Blikre.
Video Transcript
ALEXIS CHRISTOFOROUS: Let's get to Darrell Cronk, president of Wells Fargo Investment Institute. Good morning, Darrell. What do you make of the market action this week? We saw sort of that rotation out of tech for most of the week. And now investors seem to be rushing back in.
DARRELL CRONK: Yeah it's a great [INAUDIBLE]. Good morning, everyone. It is a little bit of rotation. We're seeing a bit in cyclicals, a little bit of industrials and some of the material sectors that we haven't seen in a while. And, candidly, we're actually getting a rotation into some value areas. So banks are up about 8%. Financials are up about 8% this week versus tech down about 1%. So you are seeing some of that rotation, probably on the backs of digesting some of the earnings released. It was a heavy week, of course, for financials with earnings.
BRIAN SOZZI: Darrell, did Reed Hastings-- Netflix CEO-- did he call the market top in big tech? When I hear an executive of that stature hop on his earnings call, hop on his earnings call, and say to people we're trying to tamp down expectations, to me, it suggests that the market is completely out of whack.
DARRELL CRONK: Yeah, I'm not sure that it's a top, yet, Brian, for tech. We still like tech. We still think capital is going to flow to where growth resides. And there's no doubt that growth resides in the tech sector.
Have prices gotten ahead of themselves a little bit over the last 30, 45 days? Possibly. So you may see them settle down. We don't look for any big correction-- maybe not the sizable gains that we've witnessed over the last several weeks.
And I think it's really dependent upon how the economy does here in the second half. I mean, if you look at some of the guidance of people that we follow and respect, the scientific community is still telling you there's some caution ahead as we head into late summer, early fall around COVID, right. In the cases we see that. If you listen to any of the Fed speak or speakers, they're trying to walk back and talk down the economy as well. And then, of course, you know, early read on earnings season, we saw the banks come out and put sizable provisions and sizable reserves aside for what they believe is a tough environment for the business community on non-performing assets and charge-offs into the second half of the year and maybe early 2021. So between scientific, Fed, and banks, you're still getting some cautionary call, yellow flags, maybe even some red flag signals in the near-term.
JARED BLIKRE: Let me just build on that. What-- if you-- do think the low interest rate environment that we're in, especially with 10-year yield now at about 60 basis points, is that a yellow flashing warning sign for the market here? And what about the dollar? It's been weaker as of late. But it's had bouts of strength as well.
DARRELL CRONK: Yeah, Jared, you bring up an excellent point. So I would tell you that, you know, if you look at those points I just alluded to around the economy, they're still flashing yellow. The bond market is where interest rates are-- you know, the yield curve is kind of pegged here with what the Fed has done. But it's no doubt that rates have been trending lower, which is a more cautionary sign.
And then the US dollar has been weakening of late-- we think probably dropping into a new lower trend kind of in the lower 90s from where it was before. Now, that actually puts a bid in things like commodity prices. We've seen lumber prices do well-- zinc prices, copper prices, aluminum. Even silver is breaking out. You know, all the talk is about gold and oil. But that weaker dollar is a paradigm changer for how you need to think about assets and where to invest in portfolios.
ALEXIS CHRISTOFOROUS: Darrell, do you think the market is setting itself up for failure here because it looks like investors have baked in another stimulus package from the government, and a lot of the stimulus programs are set to expire-- namely that $600 a week extra unemployment benefit going to go away at the end of July if lawmakers don't do anything? If we don't get a stimulus package or it's not as robust as the market has been baking in, what happens to stocks?
DARRELL CRONK: Yeah, I think that's a real risk, Alexis. So, you know, Nancy Pelosi was out last night talking about she still thinks they can get somewhere close to a $3 trillion stimulus package on phase four. The Republicans are much more sanguine about that. Their number is closer to a trillion to a trillion and a half.
We'll see here. The next week starts the real negotiations. When Congress comes back on July 20, there'll be fits and starts. We do still think they'll get something done-- probably in that trillion to trillion and a half number. And I think they will extend unemployment insurance extra benefits, like you're talking about but not at the $600 a week level-- maybe something more akin to like $300 a week for three to four months out to October or November just to try and serve as that bridge.
Congress recognizes they have to get something done. But the debate about what they get done and by how much is going to be much more contentious than it's been in prior packages.
BRIAN SOZZI: Darrell, only a trillion dollars-- it's difficult to think that type of package might disappoint the market. But do you think it would?
DARRELL CRONK: I think it would, Brian. I think a trillion would be on the low end of the range of what the markets are expecting. You know, it's going to be focused around the unemployment benefits we just talked about. It's going to be focused on state and local government aid.
And then there's a debate about whether more consumer stimulus checks go out directly to consumers. The Republicans very much want liability shield for companies negotiated into this. But if we get just a trillion dollars on this-- I agree with your point. A trillion dollars is a huge sum of money. But I think the markets were expecting that as a minimum baseline.
ALEXIS CHRISTOFOROUS: Are there any sectors, Darrell, that you are staying away from? At the moment, I mean, we see that investors are piling into tech. There has been talk about high valuations there. You seem to still like tech. But any areas that you're just saying, you know what? Not for me, not right now.
DARRELL CRONK: Yeah there's-- it's a good point. There's four sectors we don't like. Two of them most unfavorable-- the most unfavorable we can be in a portfolio, which basically puts us at a zero weighting. Number one, not surprisingly, is energy with all the headwinds that have faced that. We also don't like the materials sector either. We think earnings growth there is very limited, very challenged-- just not a lot of compelling valuation reason there.
And then if you go one notch down, we're still leaning against industrials. And we're still leaning against REIT. We think the real estate market is a very bifurcating market going forward. It narrows on the opportunity set, and is very challenged going forward.
Most of your real estate challenges probably lie ahead of us, not behind us yet. And even though REITs look cheap on a discounted net asset value, history teaches us that when they trade at those levels, it's usually for a reason, and it's not usually a great place to add new capital at those prices.
ALEXIS CHRISTOFOROUS: I just wanted to follow up on real estate for a moment. We got some news out this morning on the real estate market-- housing starts jumping 17% last month during this pandemic and mortgage rates being at a record low right now-- 30-year below 3%. Are you not bullish on the housing market at the moment in real estate, and why not?
DARRELL CRONK: I think you can be semi-bullish on residential. What I was talking about was more commercial, industrial, and office space, which is usually the bulk of what makes up the REIT area, more so than residential housing. You do have multifamily embedded in REITs that has some residential elements to it.
Your point is a good one, Alexis. We think the housing market still has a somewhat floor bid under it. There is not just the low mortgage rates that have dropped almost a full percentage. If you go back a year ago, 30-year mortgages were 3.81. Today, they're 2.98 and likely still dropping as the spread narrows between where the 10-year treasury is and current mortgage rates.
The other side that's really affecting this is you have very limited supply. So you're seeing it in the builder index, the building permits, mortgage applications. There just is not the supply out there to meet the demand. There is some of this debate about deurbanization and is the mix shifting.
But, surprisingly, and I think positively, we're actually seeing the millennials engage here a little bit. A lot of the new activity and mortgage applications are coming from the younger generation. And you guys will know well there's always this robust debate about will millennials ever buy homes, or will they just forever not do the same thing that prior generations have done? And so I think that's a positive trend that's actually kicking into gear.
ALEXIS CHRISTOFOROUS: All right, Darrell Cronk, Wells Fargo, thanks so much. Have a great weekend.
DARRELL CRONK: Thanks, Alexis.
