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Pain trade is 'rotation into value,' while small caps have upside - Wells' Harvey

  • Wells Fargo Chief Equity Strategist Chris Harvey, in an interview on CNBC, notes that while the S&P's (SPX) rally off the lows was "partly" induced by the Fed and fiscal stimulus, it's ultimately attributed to the fact that investors see that earnings will be higher next year than this year, and higher the year after that.
  • Equities are following the Vix (VIX), which is following credit, and credit is following the Fed, he said. The liquidity measures implemented by the Fed have boosted access, which in turn has lowered the risk profile of those assets, boosting prices.
  • He added that ultimately the analysts expects equities to go higher.
  • The difference between now and '08 and '09 was that there was too much risk in the system, with credit seizing, whereas now, we just suffered from an exogenous shock, he said.
  • The "pain trade" therefore, isn't necessarily equities going higher, but instead, is the "rotation into value." The strategist notes that after going into value since early April, they are now rotating into small caps, which are the "next big thing."
  • Small caps have underperformed for years, and the new liquidity will help risk appetite, and the smaller caps and beaten down names will benefit the most, he concluded.
  • Small cap value ETFs: IJS, IWN, SLYV, VIOV, RZV, VTWV, XSVM, PQSV
  • Volatility ETFs and ETNs: ZIV, VIXM, VXZ, XVZ
 
 

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