Fund Managers Love Tech & Healthcare
Bank of America fund manager survey tells us what we already knew. Fund managers love healthcare and tech stocks. As you can see from the chart below, the z score for healthcare is about 2.5 standard deviations above normal. That makes sense because biotech stocks are working on cures and vaccines for COVID-19.
Health insurance stocks are befitting from the decline in voluntary procedures. To be clear, these procedures will eventually take place. It’s incredibly sad they are being delayed. We are talking about necessary procedures not plastic surgery. Some people are in a lot of pain because they are too scared of COVID-19 to get them done.
Healthcare index is just below its record high. It rebounded quickly, regaining almost all its losses by mid-April. In March every stock fell. Stocks that rebounded the hardest were the ones that aren’t hurt by COVID-19 or are hurt the least. A few companies are benefiting from this situation like Zoom.
XBI biotech ETF is up 55.65% from the bottom on March 16th. It’s up 4.37% from February 19th. Healthcare sector has actually been underperforming the market in the past few weeks. Since April 17th, the index is down 0.74% which is worse than the S&P 500 which is up 1.68%.
Just as fund managers went all in on healthcare, the sector started to underperform. If the stocks that are hurt by COVID-19 don’t lead the market in the next few weeks, it might not rally because healthcare is done outperforming for now.
Financials & Cash
That same distinction can be applied to some of the financial services stocks. It’s a situation where the “haves” vastly outperforming the “have nots.” MSCI has been the leader of the pack as its stock is up 50.25% from the bottom and 1.63% from its February record high. That’s much different from the banks which are in bad shape. As you can see, managers are underweight the banks.
Wells Fargo has been one of the biggest underachievers as the stock is down 49.79% from February 21st and down 55.27% year to date. The stock is at the same price it was at in 2003. That’s 17 years of nothing other than dividends. This was one of the best banks during the financial crisis. But bad sales techniques caused it to lose public credibility.
When you hear people wondering about the bank’s solvency, that’s a buying opportunity. However, It’s likely short term trade because it won’t become a secular growth company. And it’s unclear if the management team can turn it around quickly.
Cash has the 2nd highest Z-score as it was above 1.5. Professional investors are cautious while retail traders are optimistic. Managers are overweight U.S. stocks even though America has been the hardest hit by COVID-19. For example, there have been 362,630 cases in New York alone which is more than Russia which has 308,705 cases.
Russia has the 2nd most outside of America. By the way Brazil is a hotbed for the virus as it had 16,517 new cases on May 19th which was the highest ever. It had 1,130 deaths on the 19th which also was a record.
Tech Is Over-owned
Getting back to this survey, managers are long the U.S. because of its big technology stocks. Many years ago managers were saying America was a bad place to invest because of its low GDP growth compared to emerging markets. A problem with emerging markets is they are inconsistent. That being said, the pendulum has swung too far in favor of American stocks and big U.S. tech stocks. They are taking over the world.
Sentiment on the cloud stocks is insane. The CLOU ETF is up 16.9% year to date. ServiceNow is up 31.47% this year and 53.42% from April 3rd. It has a market cap of $73.02 billion. That being said, it’s a much better business than Shopify which isn’t even profitable. Cloud investors are so euphoric that someone unironically told me I wasn’t a real investor for wanting to own railroad stocks opposed to having a portfolio exclusively in momentum tech.
People have portfolios that are all in these cloud names. They claim to be diversified if they own a momentum tech stock like Nvidia. Having a portfolio all in one industry or sector is a mistake. Doing so with the hottest sector is financial suicide.
Energy Is Ignored
Energy is cyclical, but that doesn’t mean it’s never a good investment. It is a good investment at cycle bottoms like we’re at now. Oil prices went to negative $40. If that’s not the bottom, we don’t know what is. Oil has rallied back to the low $30s where it belongs until the COVID-19 crisis is over.
When it ends, can get to the $60s or even $70s. Oil’s fair value is somewhere in the $50s which is where fracking is economic. However, it will rise above that because of the decline in drilling. Despite energy being the best performing sector since the bear market bottom, fund managers’ position is at a -2.2 Z-score.
Managers Love Bonds
No one believes in inflation. Gold is rallying because rates are near zero, not because of inflation. Rates are near zero and energy is under-owned, because investors don’t fear inflation. Deflation will come before inflation, but inflation will be back by the 2nd half of the year as the economy recovers.
Specifically, the 10 year yield is at 70 basis points which is only 13 basis points above the record closing low even though the stock market is signaling the economy isn’t near a disaster. COVID-19 stocks haven’t done well, but even they have beaten out shorting bonds.
As you can see from the chart below, asset managers are pessimistic, so they are all in on bonds. Net percentage saying they are overweight bonds is the highest since July 2009. There’s not much room for the TLT to rally further. It’s already up 13.38% since March 18th.
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