Big banks have room to rally: CIO

Barrett Asset Management's Amy Kong tells Reuters' Fred Katayama why stocks of major banks and private equity firms stand to gain in 2021.

Video Transcript

FRED KATAYAMA: Stocks on Wall Street rising Wednesday with value stocks in the Vanguard. Let's get an assessment of the markets from Amy Kong of Barrett Asset Management. Welcome back and good afternoon, Amy.

AMY KONG: Thanks Fred.

FRED KATAYAMA: Well Amy, we had a slew of weak economic data today. A drop in personal spending, a drop in personal incomes, a drop in new home sales, and a drop in the pace of gains of business spending. Are investors justified in pushing the markets up in a Santa Claus rally given the dire economic news that we keep getting? We just had existing home sales yesterday among other things that were down.

AMY KONG: That's a good question, Fred. I think the data points will ebb and flow as-- as you pointed out. But the main key metrics that I think investors are pointing to is whether or not fiscal stimulus is continuing on. And as we've seen earlier this week, the answer to that question is yes. And quite frankly, this is the time of this pandemic, nine, 10 months out, where fiscal policy, monetary policy, and now a health care solution is-- they're all aligned. And I think that really does make up a pretty good setup in terms of why investors are still pushing equities forward.

FRED KATAYAMA: I see. Yeah, riding high on the vaccine news now that it's being distributed. Let's get to the rotation theme. Today we see value in the Vanguard, but then again just yesterday it was tech stocks with the NASDAQ up and the value stocks down. Is this rotation going to stick, this rotation away from tech to value? Or is it going to be a barbell market where you got both of them somehow?

AMY KONG: You probably will have both of them. I think the rotation from growth to value is really ripe for-- for rotation, just because you've had a lot of push up in terms of the tech PEs. But quite frankly, too, you know, in terms of the value stocks that you've mentioned, they are actually the companies that are hurting from an earnings standpoint. So I think, really, when you think about this rotation, it's a lot of money on the sidelines now rotating back into the markets. As we've seen in November, over $50 billion of cash came into equity ETFs and mutual funds.

And really, again, this P to E discrepancy between growth and value stocks has gotten too wide, and so there is a little bit of rotation from-- from higher PE stocks to lower PE stocks. But really whether or not it will stick, it really is going to be earnings dependent. Because, again, if earnings don't catch up, and again, the pandemic continues to roll on, that's going to be an issue.

FRED KATAYAMA: Then-- let's get to that next step, then. How do you see earnings working out for the cyclical sector versus, say, the growth?

AMY KONG: I think earnings will catch up to a degree. Again, this is all under the assumption that 2021 is, again, poised for a better set up and the vaccine starts to work. But really it's going to be in phases. So for example, right now in terms of stocks that we may be looking at, we may be more interested in restaurant suppliers. And as we all try to come back into a normalized environment, I think it's going to be done in steps. Maybe we'll go into a Starbucks or Dunkin' Donuts or something, get our coffee, and then perhaps go into a restaurant.

But in terms of booking large vacations and things of that sort, those are all maybe third to fourth tiers in terms of how quickly we'll-- we'll move back to normal. So I think the earnings will catch up but it will be in phases.

FRED KATAYAMA: Well, over the last few months, Amy, we have seen value stocks not exactly catch up but really coming back as opposed to tech stocks. Are there any undervalued section-- sectors within value stocks that you think-- the ones you're to ponder-- people who with cash on the sidelines should be going into or rotating out of from tech stocks into?

AMY KONG: I think there are some areas that will be helped by the vaccine. One area that we are paying more attention to are the financial services sector. This may include big banks, but really also publicly traded private equity firms. Things of those nature where they are sitting on a tremendous amount of cash and can be predators in this kind of environment. I think the banking sector, while they've had some decent news this week where they can now start buying back shares, things of that sort, they will still be held back by the fact that interest rates are very low.

Other value sectors, like energy as an example, may be helped by a vaccine. Perhaps demand may start going higher. But the vaccine doesn't help the supply side of the equation, which has been part of the reason why the sector has been under pressure this year. So it really is, again, very dependent on the sector. But certainly, I think, if I had to pick one sector where I'd pay a little bit more attention to, perhaps financial services would be that one sector.

FRED KATAYAMA: Our thanks to Amy Kong of Barrett Asset Management. I'm Fred Katayama in New York. This is Reuters.