Analysis: Fund managers see value, cyclical stocks continue despite slow recovery in US jobs

© Reuters. FILE PHOTO: A man walks past the New York Stock Exchange on the corner of Wall Street and Broad Street in New York City, New York, the United States, March 13, 2020. REUTERS / Lucas Jackson

By David Randall

NEW YORK (Reuters) – While some technology stocks rallied on Friday after a disappointing U.S. jobs report, some portfolio managers say the staggering profits of several large tech companies in recent weeks are not enough to continue placing oversized bets on the sector.

Instead, these fund managers say they will continue to morph into value and cyclical stocks – whose wealth is closely tied to economic conditions – in expectation that the economic recovery will be longer and more gradual than originally thought.

The notion that the US job recovery has not yet peaked was reinforced by data from the Department of Labor on Friday that showed US employers hired far fewer workers than expected. The lower-than-expected job growth is likely to sustain the Federal Reserve’s adjustment measures for a longer period of time, economists said.

The transition between the stay-at-home economy and a full reopening is expected to take at least a year, making value stocks more attractive than technology stocks during that time, said Barry James, portfolio manager at James Investment Research, who remains underweight on technology.

“In the short term it may jump back and forth, but we believe we’ll be in this transition for at least a year or more,” he said.

Big technology stocks rebounded on Friday after the employment report tampered with inflation worries and pushed 10-year Treasury Department returns near a 2-month low, but the direction of the economy remains intact and should continue to favor cyclical stocks over defensive stocks Sameer Samana, Senior Global Market Strategist at Wells Fargo (NYSE 🙂 Investment Institute.

“We would not read too much on any job report and continue to believe that the job market will stay on track and will be more than enough to underpin consumer confidence and consumption,” he said.

Despite Friday’s gains, large-cap tech companies continue to lag behind the broader market. Apple Inc (NASDAQ 🙂 is down nearly 2% year-to-date, Amazon.com Inc (NASDAQ 🙂 is up less than 2%, and Netflix Inc (NASDAQ 🙂 is down 6.5%. Overall, the technology sector has grown by 6.8% since the beginning of the year, which is roughly half of the general growth of 12.6%.

Instead, value companies are growing in such cyclical areas as finance, energy, and consumer discretionary. The Russell 1000 Value Index is up 18% year to date, including a 0.7% gain on Friday, while the Russell 1000 Growth Index is up 6.3% and up 0.6% on Friday.

“You have had some people say this is as good as it gets across the board. High momentum, peak growth, peak profits, but the market is getting the background wrong here. For the rest, you will see robust growth this year,” said Jack Janasiewicz, portfolio strategist and portfolio manager at Natixis Advisors.

Funds that remained strong growth stocks rose on Friday and the ARK Innovation ETF was up 1.4% by the afternoon. Nevertheless, the fund remains down more than 10% over the course of the year.

At the same time, the stretched valuation of big tech companies makes them less attractive than cyclical stocks, which are likely to see the biggest boom in the next year, said George Young, portfolio manager at Villere & Co.

For example, the S&P 500 tech sector trades 33.8 times trailing profit, more than twice as much as the S&P 500 financial sector, which trades 16.2 times trailing profit.

Young has built on his position in cyclical companies like casino company Caesars (NASDAQ 🙂 Entertainment Inc, a position he described as “the opposite of stay-at-home trading.”

“People turn the corner and say,” We can see the light at the end of the tunnel and don’t have to say anything at home. “So investors are looking for what’s next,” he said.

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