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Thursday, April 22, 2021 | 03:35 am
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This Is When To Sell Cyclical Winners and Buy Back Tech Stocks, JPMorgan Says

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This Is When To Sell Cyclical Winners and Buy Back Tech Stocks, JPMorgan Says

U.S. stocks began the week in subdued fashion after Dow Jones Industrial Average DJIA, +0.53% and S&P 500 SPX, +0.65% closed at record highs last week.

It comes as the yield on the U.S. 10-year Treasury TMUBMUSD10Y, 1.593% held steady at 1.613%. However, attention will quickly turn to the Federal Reserve’s meeting on Wednesday, which has become key in the context of rising bond yields in [recent weeks. The central bank is under pressure to prevent a further destabilizing rise in yields.

In our call of the day, JPMorgan strategists said the rise in bond yields wasn’t over yet and that it was premature to start selling cyclical stocks and buying back defensive equities, such as healthcare and technology stocks.

The investment bank’s strategists, led by Mislav Matejka, said valuations of cyclical stocks — those that stand to gain as economic activity picks up — were beginning to look “toppy” after their strong run over the past year.

European cyclical, for example, have outperformed defensive stocks by 57% over the past 11 months — ranking near the top when it comes to pass recoveries. As a result, they said the bulk of the cyclical/defensives move “might be behind us,” given the size of the cyclical run and their stretched valuations.

But the strategists warned it was still “premature” to position for a reversal. “For that, one needs to see peaking PMIs, weakening relative earnings, and an end to rising bond yields,” they noted.

Those three crucial things are unlikely to happen just yet, they said, with earnings momentum for the cyclical set to “continue accelerating over the next few quarters”. As for purchasing managers indexes, the desynchronized nature of the global cycle — with China potentially peaking, the U.S. approaching highs, and Europe looking to pick up over the summer — means a peak isn’t imminent, they said.

The key factor for cyclical remains the direction of bond yields and, importantly, JPMorgan strategists said the up move in yields wasn’t finished yet. “Yes, in the short term policymakers will keep pushing back, but [they] are likely to accept higher yields down the line, as the economy strengthens”.

“As long as yields are moving up, cyclical should not be sold,” they added.

Value stocks, on the other hand, continue to look very appealing, JPMorgan said, as it focused its long positions on banks and the reopening trade.

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