Big banks have room to rally: CIO
Barrett Asset Management's Amy Kong explains to Reuters' Fred Katayama why stocks of major banks and private equity firms will rise in 2021.
FRED KATAYAMA: Stocks on Wall Street rise on Wednesday with value stocks on the Vanguard. Let's get an assessment of the markets from Amy Kong of Barrett Asset Management. Welcome back and good afternoon, Amy.
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Amy Kong: Thanks Fred.
FRED KATAYAMA: Well, Amy, we had a lot of bad economic data today. A decrease in personal expenses, a decrease in personal income, a decrease in new home sales, and a decrease in the pace of profits in business expenses. Are investors entitled to drive the markets higher on a Santa Claus rally, given the bad economic news we keep getting? Yesterday we just had existing home sales, among other things, which were in decline.
AMY KONG: That's a good question, Fred. I think the data points will drain and drain like this as you pointed out. However, the key metrics that I think investors are pointing to are whether or not fiscal stimulus continues. And as we saw earlier this week, the answer to that question is yes. And frankly, this is the time of this pandemic, nine, ten months later, when fiscal policy, monetary policy and now a healthcare solution are aligned. And I think that really makes a pretty good setup when it comes to why investors are still pushing stocks.
FRED KATAYAMA: I see. Yes, now that it's being distributed, the vaccine news is high. We come to the subject of rotation. Today we see value in the vanguard, but just yesterday it was technology stocks with NASDAQ up and value stocks down. Will this rotation continue, this rotation away from technology to value? Or is it going to be a barbell market that you both kind of have?
AMY KONG: You will likely have both. I think the rotation from growth to value is really ripe for - for rotation just because you've put a lot of pressure on the technical PEs. But quite frankly, you know, when it comes to the value stocks you mentioned, it is actually companies that are hurting from a profit perspective. I really think if you think about this rotation there is a lot of money on the verge that is now turning back into the markets. As we saw in November, over $ 50 billion went into equity ETFs and mutual funds.
And really, that P-to-E discrepancy between growth and value stocks has gotten too big, and so there is some rotation of - from higher PE stocks to lower PE stocks. But whether it really will stay or not, it will really be income dependent. Because even if profits don't catch up and the pandemic continues, this will be a problem.
FRED KATAYAMA: Then ... then we come to the next step. How do you see returns for the cyclical sector versus growth?
AMY KONG: I think revenue will catch up to some extent. Again, assuming that a better facility will be ready again in 2021 and the vaccine will begin to work. But it will really be in phases. So right now we may be more interested in restaurant suppliers in terms of the stock levels we may be looking at. And since we are all trying to get back to a normalized environment, I think this will be done gradually. Maybe we go to a Starbucks or Dunkin 'Donuts or something, get our coffee and then maybe go to a restaurant.
But when it comes to booking big vacations and things like that, those are all maybe third to fourth tier when it comes to how fast we go - we're going to get back to normal. I think revenue will catch up but it will be phased.
FRED KATAYAMA: Well, in the past few months, Amy, we've seen value stocks not catching up, they're actually coming back, unlike tech stocks. Is there an undervalued area - sectors within value stocks that you think of - the ones to think about - people who should get into or out of tech stocks with cash on the sidelines?
AMY KONG: I think there are a few areas that the vaccine will help. One area that we are paying more attention to is the financial services sector. This can include large banks, but also publicly traded private equity firms. Things like that where you can sit on a tremendous amount of money and be predators in such an environment. I think that while the banking sector had some decent news this week that it can now start buying back stocks, things like that, they are still held back by the fact that interest rates are very low.
Other sectors of value, such as energy, can be supported by a vaccine. Maybe the demand will increase. But the vaccine doesn't help the supply side of the equation, which was part of why the sector has been under pressure this year. So it is very dependent on the industry again. But I think if I had to pick one sector that I would pay a little more attention to, maybe financial services would be that one sector.
FRED KATAYAMA: We thank Amy Kong of Barrett Asset Management. I'm Fred Katayama in New York. This is Reuters.
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