Wells Fargo's Wren is 'Leaning Cyclical' Through 2016 (Audio)

lower for longer. The tenure of thirty seconds that yield one point seven percent, gold surging two point seven percent up thirty two seventy ounce to twelve forty five, Oil down forty cents forty eight seventy seven of barrel on

West Texas Intermediate Town, eight tenths of one percent. Equities lower with thirteen minutes to go ahead of the close, SMP down five to two thousand ninety nine and drop there of three tents of one percent and has stackdown twenty ate a drop of six tents of one percent down, industrials down twenty or a drop of point one percent. I'm Charlie Pellatin. That's a bloom Grind business flash. Thank you very much. Charlie Pellett It's time now for the e t F Report. It is brought to you by

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Kathleen Hayes on Bloomberg Radio. What's a difference much weaker than forecast jobs report? I can and make bonds and rally mode stocks lower, although not as low as they were early in the day. What does this mean as we move into the second half of this year? Joining us now as Scott Rendy, Senior Global equity Strategist at

Wells Fargo Investment Institute. Scott, welcome back to the show. Hi, Kathleen, Thanks so uh you can whether or not you say, oh, this is just a one off week job support or or not, I would say that if you're an equity strategy like you, you still have to contend with an economy that has been mixed at best on a lot of the numbers so far this year. Now you get this ominous sign, do you change your strategy? Do you pair something back, what do you do? I think I

do not think you do that, Kathleen. And the reason I say that is because really our overall theme is modest growth and modest inflation. The labor market is slowly moving in the right direction, the economy is slowly moving in the right direction. Is going to look at a lot like twenty fifteen that looked a lot like that looked at like. So I mean, we're moving slowly in the right direction. Uh. Today's non farm payroll number that

was a surprise, no doubt about it. UM. But I think, UM, I think the market, the market clearly absorbed this news pretty well. And when I look at that at data, you know, hey, two and a half percent year over year uh, average hourly earnings change, which I believe is the most important number in that report, UM, and has been for the last six or seven months. Um. You know,

there's nothing to get excited about. But I don't think it's the end of the world either, And I don't want to say it's a one off, but I don't think this is the start of a trend. All right, Well, I'm glad it's not the start of a trend or at least, it's not going to get you to too worried, Scott. But you keep talking about the things moving in the right direction. How do you know they're moving in the

right direction until you've actually reached your destination. Well, Pim, you know, of course, what they're paying us to do is to try to make some projections here and I'll give you an example. Um. You know, average hourly earnings which I'm sorry, initial jobs claims come as comes out every Thursday at eight thirties Eastern time. That is a great leading indicator. And we look forward on that and we make projections on that number, and we're through about

January of twenty seventeen. That's about as far out as we can look and feel like we have a lot of accuracy. UM continues to be under three hundred thousand. Any time you see that number under probably even three and two. Uh, that's a darn good number. So you know, it's things like that leading indicators when we project l A I UM. The economic indicators when you when you look at the but that's the economy. I'm talking about

the stock market. I mean the reason the stock I mean, you know, you have to think about the economy is what allows companies to prosper or to not prosper. So the foundation of everything we do is trying to figure out what's the economy going to look like going ahead. I think valuations here in the US there's only slightly ahead of the thirty year median um. And you know, let's face that the Federal Reserve is not going to

tighten up on us. You know too much here, I don't think, or at least we're not counting on it. So corporate earnings are going to look a lot better in the remaining part of the year. The GDP growth is going to look better. It's all going to look better. In the market knows that. That's why we're sitting up here, Spire.

The bond markets begs to differ, do you think, I mean, you've got the tenure down to one point seven, you've got the tier down to point seven seven, big move up and utilities David by con Inison and cepra Well, Kathleen, I hate to admit it, but as an equity guy, bond guys are smarter um but um but and you know one seventy one seventy tenure yield um? Does that

make me happy? It definitely doesn't. Does it make me think that the equity guys um are are are you know wrong, and the bond guys might be right and we might see this yield dip even lower. I don't know. I rolled that through my mind all the time. But certainly we're in a modest growth environment. There's no reason to expect that we're going to see much more than you know, two p growth this year, probably next year as well. So you know, we're in a mode here

where they're some flight to quality. It's slow growth, um. But you know, you have to say if if you think this tenure yields going below one fifty, I mean that's that's not a good sign um. So I'll leave it at that. But unless you happen to be long bonds, well, unless you have to be long bonds, and of course, you know with with the clients and and you know, retail clients are bread and butter here and we tell them to have diversified portfolios. And this is one of

the reasons why we do that well Scotts. We've discussed earlier with George goncab Is from Nomura. Part of the reason bonds are doing so well is because of there's so many negative bond yields around the world. The treasury is the plate pressure markets a place to be. I want to get more specific about stocks because if you're right, if you kind of just better, we don't know what what what are good investments right now? What industries look good to like, go to technology banks sold off today?

Is their value there? What do you suggest? Well, financials we can't get too excited about, just because we don't think interest rates are going to be moving enough in the economy is not going to be elerated accelerating enough to get excited about financials. But we we are overweight the consumer discretionary sector in there, things like household appliances, general merchandise stores, Internet, retail. Those industry groups look good.

Industrials we like things like industrial conglomerates, conglomerates, construction engineering. We were overweight technology, so that'd be semiconductor equipment, application, software, consult against services. And we also recently added healthcare to our overweight recommendations. And you know that's traditionally a defensive sector.

We've been leaning cyclical, but I think when you look at evaluation relative valuation, healthcare has gotten hit here on evaluation purpose, on evaluation basis, or something like Telecom, which we went underweight on had been, you know, really outperforming. So uh, we like healthcare, but it's purely evaluation play. I continue to believe healthcare is going to be a defensive sector. Earnings growth is not going to be anywhere near what it was when we had to surge after

the initial A c Affordable Care Act came into play. UM. But you know, those are the four sectors that we like. Three of them are very cyclical, one of them is defensive, and we certainly want to lean cyclical um through the balance of this year. Hey, Scott, let's just suspend this idea for just a second that the economy and the stock market or linked, just for argument's sake. I've been looking at some details having to uh deal with equity funds.

Global equity funds recording net outflows about nine billion dollars cumulatively over the past seven weeks. We're talking about a fifty nine billion dollar outflow. If you take the idea that the reason stocks go up is someone else is willing to pay more for the stock that you bought, is there a possibility of people just I'm not interested in putting them money into stocks. Stop. You know, PIM, you and I have talked about this really probably for

the last couple of years at least. And you know, retail clients have been sitting on their hands. The volatility earlier this year didn't help. They didn't sell on the way down, they didn't buy on the way back up. Um. Our clients have too much cash, at least it's in our opinion, they're underinvested in stocks. Uh, they're fearful of the market. So UM, you know when I hear the numbers on the outflows, UH, to me, you know, here we are within a couple of percent of the all

time record high in the SMP five hundred. After all that outflow, UM, to me, that's a contrarian indicator. And when when retail investors are hesitant, when they're cautious, and you see these outflows, UM, you know, to me, we're not at the top in the market. And that's a that's a good contrarian indicator. So it makes me actually feel better that that target we have. Your end is uh is good. Thank you very much. You're good to

have on always. Scott Ran, Senior Global equity strategist, Wells Fargo Investment Institute, giving us his thoughts and details about the stock market. It ain't over yet. We're coming up to the clothes you're listening to Taking stock on bloomberg Rade,