Carl Quintanilla: With is now on Where Stocks Go from Here is Keith Lerner, Chief Market Strategist at SunTrust, and Jack Ablin, Founding Partner and CIO at Cresset Wealth Advisors. Morning guys, good to see you both.
Both: Good morning.
Quintanilla: Jack, let me begin with you. 2760 here, as more optimism about US-China trade, and the border I assume, is driving things. How much do you think the rally we’ve have since that Christmas Eve needs to be digested here? This is going to create a little more FOMO, having reached that 200A.
Ablin: Well, I think we were a little bit overdone to the down side. If you look at investor sentiment at year end, we were at the lowest level of optimism since the financial crisis. So I think that some of this was just a simple bounce back of reality and expectations. That said, we do need to see some progress in these China trade talks. My concern however, that this tactic which has turned into a strategy, will likely morph into a policy. And there may be tariffs that are going to be in place indefinitely. And I want to make sure that investors understand and calculate that possibly into their current assessment of the market.
Morgan Brennan: Yeah, and Keith to that point, that does seem to be one of the key questions here. Is are those tariffs immediately going to come off if there is in fact some sort of deal that happens? Do they get gradually reduced, do they go back on? Are we even going to get a deal?
Keith Lerner: Yeah, I think that’s actually an open question. I think the more important thing is that there’s progress being made, and there’s likely to be a deal some time over the next several months. Listen, there’s a big incentive for the administration to have the economy looking good into the election next year. And I would say the big thing is, when all these fears that people have been talking about over the last several months, don’t forget, a lot of those fears were overdone. And they become catalysts. So you had concerns on trade, you’ve seen some progress. You’ve had concerns about earnings, we’ve had a better than expected earnings season. You had concerns about the Fed, and now the word patient is in the vocabulary. So all those things have become catalysts. I would say short term, because of the FOMO and investors are still somewhat under-invested, we could squeeze a bit higher. But we do suspect we’re due for a period of consolidation, after a 17% move off the lows.
Jon Fortt: A couple of data points that are out there. On the one hand, the labor market looks pretty tight. Workers are quitting. On the other hand, we just got this number showing that they are more auto loan defaults than there have been in a really long time. So worker wise, consumer wise, are things healthy or not? Should we be looking at positive or negative impact down the line on companies because of these data points?
Ablin: You know, just about every metric that I look at in the labor market and household income would suggest happy days are here again. We’ve had wage growth of 3.2%, we’re projecting an additional wage growth of 3% over the coming four quarters. That’s leaving overall inflation in the dust. And yet you’re right, this Fed report on auto delinquency is a head scratcher, because it just doesn’t seem to add up with all of the other pieces that are falling into place. That said, we’re looking at work stoppages. Work stoppages now over the last 12 months have involved over 700,000 people. This does not include the government shutdown. That’s the highest level since 1983, when we had a very tight labor market and inflation was running near 4%. So that is somewhat of a concern, but we do have to weigh these auto delinquencies into the consideration.
Brennan: Keith, you just mentioned that 17% gain from the bottom, you also mentioned consolidation. Where should investors be putting their money right now?
Lerner: The way we’re thinking about it big picture, because we invest globally. So we are invested with a bias towards the US. We have increased immersion markets, in our most tactical portfolio we made a big increase in immersion markets in October. And in a sector level, I think we should be playing a combination of offense and defense. We came to the year very bullish on technology, and also industrials, which is the best sector year to date, because we thought a lot of bad news was priced in. And you’re seeing now technology, as far as like software, some of the internet names, regain leadership. So we like that. But we also want some areas like healthcare and consumer staples that are less dependent on the economy. And as we have some volatility, which we do think will come back into the market in the months to come, that you’ll be able to withstand that somewhat. So we like again, staples and healthcare on the defense side.
Quintanilla: Hey Jack, one last thing on sector correlation. Everything is really tight together right now, as we await this one big binary thing that is US-China trade. But if we get it, how much does the sector correlation bust up? What’s the, how does that affect the VIX in the longer term?
Ablin: Yeah, I mean I think that the sector correlation, high sector correlation would suggest obviously a lot of passive investment buyers. And that could certainly spike the other – spike if people started leaving the market. And that would raise VIX. The fact is, you’ve got a lot of macro investing going on, and that suggests that high correlation. One of the things I like, speaking of correlation, is the relationship between the relative strength of financials and the health of the overall market. I do like the fact that now financials are starting to outperform.
That’s a good indicator. In fact, the relative strength of financials is pretty highly correlated to the overall direction of the market. So financials is a sector that I’m keeping an eye on.
Quintanilla: Yeah, that’s key to watch. Guys, good start to the hour, appreciate that very much. A lot to watch today. Keith and Jack, we’ll see you soon.
Ablin: Thank you.
Lerner: Thanks, guys.
Courtesy of CNBC
Keith Lerner, Investment Adviser Representative, SunTrust Advisory Services, Inc.
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