Cyclical stocks may be racing higher, but tech is still expected to be a long-term winner

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Traders work the floor of the New York Stock Exchange.

NYSE

FANG may be lagging, but don’t count technology stocks out.

Positive news on vaccines has spurred buying in cyclical stocks that should do well when the economy is running at full speed again. Last week, tech stocks, and high-flying FANG names, sold off after Pfizer’s positive vaccine news drove investors into many of the stocks that have been lagging since the economic shutdowns last March.

Moderna’s positive vaccine news sparked the same reaction Monday, with FANG names — Facebook, Amazon, Netflix and Google-parent Alphabet — all trading flat to lower most of the day. Except for Netflix, the others closed higher on the day after a late day buying suge. Tech tech gained 0.8%, gaining about 0.3% at the end of the day.

Facebook and Alphabet are in the communication services sector and that sector was also up just slightly, compared to a 6.5% gain in energy; a 3.4% jump in airlines and a 2.5% increase in industrials.

“The money is coming from the sidelines so that money goes into stocks and it’s going to push everything higher, especially if growth and tech is 75% of the market,” said Tom Lee, founder of Fundstrat. “People are taking cash off the sidelines and buying market exposure. It’s going to lift all boats.”

Netflix and Facebook are considered stay-at-home stock plays that should benefit if the economy is shut down or people opt to stay at home to avoid the virus.

“I think the active equity manager made a lot of money on stay-at-home stocks. Now, there’s tailwinds for the cyclical trade,” said Lee. He said those companies at the epicenter, like airlines or hotels, have cut costs and should see a topline recovery.

“You can see why people go crazy over them. I think there will be more juice for them in 2021,” he added. “In 2020 alone, the performance gap 70%. If the market is up 10% in the next year, the stocks at the epicenter could be up 80%. There’s that much juice in them … It’s stocks like Six Flags, it’s what you think was hit hardest in social distancing.”

But Lee stresses that tech is still core and important to hold.

“The revenue growth is going to be superior to the overall market,” he said. “I think it’s got legs. I think more money comes from the sidelines, so I’m not selling growth or tech.”

He also expects the market to keep rising into the end of the year, and his S&P 500 target of 3,250 is too low with the market now trading above 3,600. “My target makes no sense because we’re in the fourth quarter, and there’s a Santa rally coming,” he said.

‘Lousy fourth quarter’

Wit the exception of Nasdaq, the major indexes closed at new highs Monday. The S&P was up 1.2% at 3,626, and the Dow rose 1.6% to 29,950. The small cap Russell 2000 jumped 2.4%.But Nasdaq was up just 0.8%.

Lee said there are concerns that will worry investors, and the rapidly spreading virus will continue to hobble the economy even as the market can rally.

“I think it’s going to be a lousy fourth quarter and I think that’s what everyone is bracing for,” he said. “Nobody thought the vaccine was going to change the fourth quarter, but now we won’t have to think the fourth quarter is what the next six quarters will look like. Stocks do bottom nine months before the economy. If the vaccine is going to be in the summer, then all the cyclicals should be rallying now.”

Sam Stovall, chief investment strategist at CFRA, said he downgraded technology to market weight last week but he’s still positive on the group even with the vaccine trade.

“It still won’t really be opening up the economy until late second quarter, third quarter next year. We still have a long way to go to experience a weaker economy. Let’s not be too quick to give up on that growth that’s served us well,” he said.

The big internet names, such as Facebook, may not gain at the same pace they did previously, but within the technology trade there are sub-sectors that have good momentum. They include tech hardware, systems software, semiconductors, applications software and semiconductor equipment, he said.

Some parts of tech are a cyclical trade like semiconductors and semiconductor equipment. Semiconductors were up 1.6% Monday.

“What all of this means is the leadership of the market is broadening out,” said Art Hogan, chief market strategist at National Securities. “You want to have both. You just want to rebalance.”