There a uniquely bullish backdrop for risk-taking: Wells Fargo CIO

Wells Fargo Wealth & Investment Management CIO Darrell Cronk joined Yahoo Finance Live to discuss what investors should look for in the market

Video Transcript

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ADAM SHAPIRO: All right, about 16 minutes to the closing bell. And in our final call, we invite into the stream, Darrell Cronk, CIO from Wells Fargo Wealth and Investment Management. Good to have you here. And there are a couple--

DARRELL CRONK: Thank you.

ADAM SHAPIRO: --things going on right now. And what I wanted to ask you about, because a lot of us are afraid of buying at the top when there might be a dip, and perhaps we should be holding off, but there was a report from another institution that said recent funds, the flow of funds, has been tremendous into stock funds and mutual funds. So if I'm a cautious investor, is this the top that I should hold off before I jump in?

DARRELL CRONK: That's a great question. It's the one that gets circulated so much in today's world. Actually, we think there's kind of a uniquely bullish backdrop right now for risk taking. You've got just this week alone, you've got the S&P setting a new high. You've got small cap stocks setting a new high. EM setting a new high. You've got a decade high in base metals. Inflation breakevens are close to a two-year high. Credit spreads are near their tights. You've seen now four months in a row of a rotation into value from growth, which is the longest streak we've had in 2016.

So, when you look at it, you have to look for signs that you're in a topping type of environment. And actually, breadth is really widening out here. And it's quite strong. It's setting all-time new highs. When you have strong breadth like that, history tells us that rarely, if ever, do you get to big market tops and that type of environment.

SEANA SMITH: So Darrell, with all that in mind, then, how are you positioning herself? Where are you seeing opportunity in this current environment?

DARRELL CRONK: So it's a great question, Seana. I think you've got to look at small caps and emerging market equities. Both have done really well over the last 90 days. In fact, small caps have bested the S&P by almost 2,000 basis points, or 20% in the last 90 days.

It's the first time we're seeing small caps and emerging market breakout above their 50-day and 200-day moving average relative to large caps, and maybe even more importantly, relative to NASDAQ 100 and large cap tech. That hasn't happened since 2017. When it does or when it historically has, it's meant a longer tail and a longer run for those types of assets, like small cap and emerging market equities.

Within sectors, we still think you've got to favor industrials, financials, technologies, and-- excuse me-- technology and consumer discretionary. We'd fade utilities, staples, and REITs in today's environment.

ADAM SHAPIRO: But you've also-- you've moved from unfavorable-- or you've moved from unfavorable to most unfavorable. I believe it was-- excuse me, I want to make sure I get it right. Energy has gone from most unfavorable to neutral. And I love that phrase, "most unfavorable." It sounds like King George-- most unfavorable. But the energy sector has gotten beaten up. It's down 28% in the last 52 weeks. Would I read a neutral as OK, not as risky with that call you've made to get into some energy stocks right now?

DARRELL CRONK: Yeah, for all of 2020, we were as low-- we had basically zeroed out our exposure to energy, which was a huge source of attribution in counter 2020. Everybody talks about the tech outperformance or the discretionary outperformance. But frankly, if you avoided the sectors that did horrible, like energy, you had huge benefit to portfolios.

We think that dynamic is starting to change with that value rotation I mentioned. Energy is up. It's the best performing sector year to date. Now some of that's a reversion to the mean trade. The fundamentals are still challenging there. Fourth quarter earnings, energy is going to have the worst contraction of any of the gig sectors.

So we need to see more improvement there, although, you know, I mentioned base metals at a decade high. It's not just base metals. It's agricultural soft commodities are at multi-year highs. We're getting close. Brent crude is at $55. If you put a 6 in front of that, that will start to give some tailwind to the energy sector. So we've been upgrading it to kind of a neutral weighting or strategic weighting. We're not ready yet to go to a complete favorable.

SEANA SMITH: Darrell, what about this growth versus value trade? Because it seems like you're missing an opportunity in each. And I bring this up because of Netflix's earnings that we got out earlier this week. It was a very, very strong quarter from the company. This is a name that has really tremendously outperformed over the last year, going back even further than that. But do you still think there's reason to buy some of those names that led the rally in 2020? Is that where you're still seeing some opportunity within the tech sector?

DARRELL CRONK: Yeah, very much so. I think you'd want to kind of fade the software companies on the tech side and stay more into hardware and places like Netflix where you can have broadband exposure and those types of things. The reality is, tech is where growth is, right? And it's where top line growth is. And capital always flows to where growth resides.

So we think from a positioning standpoint for investors, you want to barbell that exposure. So you want to be barbelled on one end to the higher growth, places that can grow top side revenue, like tech, like discretionary. But then, on the other end of the barbell, you own things like financials and industrials that are deep value opportunities and, frankly, have underperformed for long periods of time. That strategy's been working really well.

ADAM SHAPIRO: All right, Darrell Cronk, CIO, Wells Fargo Wealth and Investment Management, thank you for your insight into the market.