There is further upside in financials: analyst

Wall Street was mixed on Tuesday, with Apple and Tesla losing ground, while materials and energy companies climbed.

Most S&P 500 sectors traded higher, while technology shares dipped in an ongoing rotation by investors out of stocks that outperformed due to the coronavirus pandemic and into others viewed as likely to do well as the economy recovers.

Video Transcript

YAHAIRA JACQUEZ: Stocks on Wall Street are mixed this Tuesday afternoon. This comes after a blockbuster rally yesterday that saw the S&P 500 enjoy its best day since June. We've definitely been seeing a lot of volatility lately. And with me to discuss this is DataTrek co-founder Nick Colas. Thank you so much for joining us.

NICK COLAS: Thank you.

YAHAIRA JACQUEZ: Nick, there's been a lot of choppy trading going on. We're seeing volatility in the bond market and in the equity market. Based on past cycles you've studied, what does this one tell us?

NICK COLAS: This one is playing very much true to form with past cycles. We tend to get initially a big surge off the bottom when we first see fiscal stimulus. We got all that last year. It was a little bit heavily skewed towards technology because of the unique nature of what happened with the pandemic. But it is the kind of classic lift off the bottom that we always get.

At this point in the cycle, call it 6 to 12 to 10, even a year on from the bottom, we do get these first rumblings of inflation that begins to lift interest rates. And the market begins to go a little bit wobbly. The same exact thing happened virtually to the day during the 2010 recovery after the '09 crisis.

And that saw a pullback of roughly 8% from the highs before the S&P went on to make new highs towards the end of the year. So we see the same kind of pattern playing out now as then, big lift off the bottom, some worries about inflation, and then a bigger lift towards the end of the year.

YAHAIRA JACQUEZ: And what does history tell us about this rotation that we're seeing? We're seeing cyclicals take off, financials and energy on a hot streak, the energy S&P 500 energy index is up 30% year to date. Do you think that at this point there is still upside?

NICK COLAS: Yes. So it's a very interesting point, because the lift off the bottom typically happens first in cyclicals. That's what happened in 1991, and 2002, 2003, and again in 2009. That's the classic early cycle playbook. We didn't get it this time. We got that big rotation to tech because it was a safe place to be.

Now we're finally seeing the rotation in what are classically early cycle groups. We like energy a lot. We like financials, mid-cap banks. We like industrials. Anything with a cyclical flavor is going to get that bid now from money that got made by buying those tech names a year ago. So it's a weird rotation, no doubt about it, very unusual, as you said, but I think very sensible given what's happened.

YAHAIRA JACQUEZ: And what else do you like among the cyclical sectors?

NICK COLAS: You know, we don't try to overthink things very much. We do think the financials have a ways to go, because longer term rates are increasing. We like industrials, not just for their US earnings leverage, but overseas earnings leverage. And as I said, we like energy a lot, because you get of a two for effect. You get not only incremental demand in terms of volume, but you get some pricing power on top of that as well.

So it's one of the few places where you can really cheer on inflation and say that's a great inflation trade as well. So we like energy, especially small cap energy. PSCE is the ETFs that tracks that group.

YAHAIRA JACQUEZ: And Nick, what does history tell us about what we're seeing right now? Obviously we didn't have Bitcoin. We didn't have retail traders driving up stocks like GameStop back then. But what does history have to tell us about these new phenomenons that we're seeing?

NICK COLAS: Yeah, it's a fascinating point, because we didn't see it in '07 and '08 for sure. People were too busy flipping houses back then. But we did see it in 1997 through 1999. There was a huge raft of retail interest. The first online trading tools really came of age in the late 1990s during the dotcom boom.

What we saw when dotcom blew up in March 2000 was a lot of that money, as it left those big speculative names, came right back into cyclicals. It came back into my old group, the autos. We saw Ford rally, GM rally, Visteon rally. And these are names that have been left for dead for five years because tech was the place to be.

Same thing is happening now. As people are rotating out of Tesla, they're buying Ford at a one year high today. They're buying GM. They're buying Goodyear that just merged with Cooper Tire. So they're coming back to cyclicals just like they did in 2000.

YAHAIRA JACQUEZ: And I want to switch over to Washington, because I know that's been on a lot of people's minds. The stimulus bill was passed in the House. Now we look to the Senate to see what it does. But what is your consensus on how this stimulus bill can drive the market moving forward?

NICK COLAS: Yes. I mean, we've had-- now, this is our third stimulus bill. We've seen more stimulus around this crisis than all the previous two or three or four combined. It's fascinating to see. The way the market is interpreting it is that this stimulus is going to end up in the revenue lines and in the profit lines of a lot of public companies, as consumers begin to spend that money.

And so the market's looking at that as saying basically 2021 earnings are a lock. We don't have to worry about 2021 at all. Usually in a cyclical recovery, you have to worry a lot, because the recoveries are choppy. That's really unique.

And I think one reason why you see a '22, '21 PE market here and no one seems to blink an eye, because we don't have to worry about the next four quarters of earnings. 2022 is a different story. But we'll cross that bridge when we get to it. It's super unusual to have an early cycle recovery with this high level of profitability and no risk to those profits.

YAHAIRA JACQUEZ: And that is because this is a pandemic fueled recession. Is that correct?

NICK COLAS: Yeah, exactly. There was a very common cause that we had to help the US economy, that people were being thrown out of work for no fault of their own. And it was the right thing to do. The sidebar to it is that it happens to generate a lot of corporate profitability, which is why the market is as resilient as it is.

YAHAIRA JACQUEZ: Nick, thank you so much for joining us and for giving us that historical perspective.

NICK COLAS: Thank you so much for having me.

YAHAIRA JACQUEZ: Thank you. I'm Yahaira Jacquez. And this is Reuters.