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Pursue the reflation trade - advisor

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As the Reddit trade fades, Clear Harbor Asset Management CEO Aaron Kennon tells Reuters' Fred Katayama investors will refocus on earnings, fiscal stimulus and monetary policy. He explains why all that bodes well for cyclical stocks.

Video Transcript

FRED KATAYAMA: Stocks edging higher Wednesday on Wall Street as the Reddit revolution is starting to show signs of losing steam. Let's find out what Wall Street will be focusing on next. We're joined by Aaron Kennon. He's CEO of Clear Harbor Asset Management. Good afternoon to you, Aaron.

AARON KENNON: Good afternoon, Fred.

FRED KATAYAMA: And Aaron, you know, GameStop, AMC, those hot stocks, they were rallying earlier, but in a very limited range. Right now they're up about 20%, but certainly not what they were just a few days ago or a week ago. So, that rally seems to be losing steam. What should investors be focusing on right now?

AARON KENNON: Well, Fred, I think what we're starting to see is sort of a refocus on some of the traditional themes that have been around for at least the last several months and that is, of course, earnings being perhaps top of the docket right now. We're in the middle of earnings season here in the United States. Looks like earnings are generally well positioned, incrementally ahead of expectations, top and bottom line relative to estimates.

And I think investors are also focused on what's happening in Washington DC. The fiscal stimulus package looks like it's going to pass at a larger level, not a smaller level, now that the Senate has agreed to the reconciliation process. And of course, the monetary side. I think that investors are still recognizing this sort of concept of don't fight the Fed, right now and the Fed is buying about $120 billion worth of treasuries and mortgages every month. And so there's quite a bit of monetary and fiscal stimulus rolling through the pipeline.

FRED KATAYAMA: OK. So you just went through earnings, fiscal and monetary. Given those three, are you optimistic about the direction for the market ahead? And if so, where should investors be putting their money?

AARON KENNON: Well, it's a great question. I think it's on everyone's mind. The estimates for earnings this year among the average analysts is that we'll see something like 25% earnings growth and that should agar higher equity valuations. However, multiples on equities are certainly at the upper sort of quartile of what we've seen over the last 25 years.

And so there's sort of a show me story, I think, that needs to occur in the market. Which is, I think we need to see the data in order to sort of recognize that these numbers are actually going to come to reality. But we're hopeful that there is a real reflation going on in the economy and that in a post COVID world, assuming that this vaccine continues to remain efficacious, which we're hopeful that it will, that we'll see nice growth, particularly in the back half of the year.

And we think that bodes well for the cyclical parts of the economy, particularly industrials, materials, and energy, which are already having a reasonable start to the year. But also the banking sector, where we may see the services part of the economy start to accelerate again. It's one of the areas that obviously was under significant pressure in 2020.

FRED KATAYAMA: Well, Aaron, a lot of talk has been about the rotation from growth, to value stocks, to cyclical stocks. But we saw tech report yesterday in the Tech Times in the form of Amazon and Alphabet coming out with strong earnings. To what extent should investors be shifting their assets over to the cyclical side, the value side, as you point out? Allocation wise?

AARON KENNON: We think a broad, sort of core allocation to both components of the market is prudent, frankly, over the long term. Where we probably would have a little bit of reticence, even though we like the mega cap tech and mega cap discretionary names like Amazon, we also believe that being massively overweight those relative to all the other market opportunities and sector opportunities may just not be the most prudent thing at the moment. Those top five, six, seven names now make up about 25% of the overall S&P 500. This is a rate of weighting that we haven't seen since the dot-com bubble. So, to be able to underweight perhaps some of those mega cap names and have a more broadly exposed portfolio may be a prudent course for this year.

FRED KATAYAMA: Thanks a lot, Aaron. Our Thanks to Aaron Kennon of Clear Harbor Asset Management. I'm Fred Katayama in New York. This is Reuters.