As Democratic control of the Senate looked more likely Wednesday, Wells Fargo Investment Institute president Darrell Cronk tells Reuters' Fred Katayama which assets stand to gain the most. He said the recent rally in cyclicals may nudge him to lift his market forecast.
FRED KATAYAMA: The Dow and S&P 500 surging to record highs Wednesday as investors bet on a possible Democratic sweep that could result in higher spending on infrastructure and more fiscal stimulus.
For more on that and the market outlook for 2021, we're joined by Darrell Cronk. He's president of the Wells Fargo Investment Institute. Happy New Year, and welcome back, Darrell.
DARRELL CRONK: Fred, happy New Year to you also and all of yours.
FRED KATAYAMA: Thank you. Well, Darrell, so what happened to those fears of a Democratic sweep that had slammed stocks on Monday? Why the change of heart today? We're seeing especially the Dow and S&P 500 rocket higher.
DARRELL CRONK: Yeah, I think it's a good question, Fred. I mean, everybody was fearful of, you know, full Democratic control or what some would call a blue wave, but I think what they're looking through to that is it means higher fiscal spending. It means the likelihood of probably a phase-five package. And it may, in fact, actually mean more wealth transfer through government from fiscal policies directly to consumers. So we may put things like the $2,000 stimulus check back on the table again under the Biden administration with Senate and House control.
FRED KATAYAMA: And that would outweigh the concerns of higher taxes or tighter regulations?
DARRELL CRONK: Today it is. I don't know intermediate or longer term whether it does, but it certainly changes the dynamics. It puts back into play this whole what we call reflation trade, which means a weaker dollar, stronger commodity prices, a shift to cyclical assets and cyclical sectors, a steeper yield curve, right? All these things that were kind of in play pre-election are coming back in vogue very strongly today.
FRED KATAYAMA: And towards the year end you came out with your investment outlook, and you predicted S&P 500 for 2021 year end at around 3,800 to 4,000. We're already getting near 3,800, about 20 points away from that. Anything that you've seen over the last month or two that would change your outlook on 2021, starting with equities?
DARRELL CRONK: Yeah, it's a good point. We put-- we put that together in kind of early to mid November for release in early December. If you recall, fourth quarter was an exceedingly strong quarter for risk assets, and in particular the month of November was the single best month of November we'd experienced in a long time. So it's likely that that number might be a little low in today's world, especially if we get a broader shift to those cyclical assets because what you could actually see there is really an expanding of breadth and an expanding of participation that we haven't seen in several years.
You know, the narrative has all been about technology and a few narrow sectors leading all the strength. And as we come into this year, you're seeing kind of a new leadership change and a new leadership shift into things like financials, industrials, materials, places that are more traditional cyclical sectors.
FRED KATAYAMA: So would you be lifting your forecasts on the S&P?
DARRELL CRONK: Yeah, I think it's likely that we probably will because I think you've got this kind of powerful macro mosaic that's happening right now. I mentioned some of those a minute ago with the weakening dollar, stronger commodity prices, steepening yield curve, right? Those type of things are really playing out to give you kind of a great risk environment into '21.
We do have some risks we have to watch for. Valuations aren't cheap. We're in about the 94th, 95th percentile on a historical basis for P/E multiples. And then you mentioned earlier you've got some risk around policy, right?
So we'll watch very closely. Personnel is policy. And so if the Georgia run-off shifts to full Democratic, then we have to watch cabinet, subcabinet, regulators, judge appointments, right? All of that comes back into play in a very different example than maybe we thought it would even a couple weeks ago.
FRED KATAYAMA: And, Darrell, today the 10-year Treasury, the yield topped 1%. What does that mean in terms of where fixed-income investors should put their money? I recall at your year-end outlook you were saying perhaps away from Treasury bonds. Where should they be putting them into?
DARRELL CRONK: Yeah, we still think you want to be in places where yield is king, so where you can get spread-- so in places like high yield, in places like corporate credit. We like preferred securities. We think now certainly municipal bonds in a potentially higher tax environment, a regime that wasn't the base case even 30 days ago, are going to catch a strong bid in this kind of environment.
We do think the yield curve continues to steepen in this kind of environment, but the key is is it steepening for the wrong reasons or the right reasons? The right reasons are because growth is coming back and you're getting that cyclical turn. The wrong reasons is if it's steepening for simply a rise in inflationary pressures.
FRED KATAYAMA: Our thanks to Darrell Cronk of the Wells Fargo Investment Institute. I'm Fred Katayama in New York. This is Reuters.