‘It would be unusual and unprecedented for a bear market to only last 30 days’: Wells Fargo Investment Institute President

Darrell Cronk, President of the Wells Fargo Investment Institute, joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss how the markets are faring amid the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to welcome Darrell Cronk now to the show. He is president of Wells Fargo Investment Institute. And he is joining us on the phone.

Darrell, good morning, and thanks for being with us. Would love your take on what we're seeing right now, this back-to-back rally. Stocks globally are rallying on the hopes that this pandemic is starting to plateau in some of the hardest hit areas. We know if history is any guide, the market seems to rebound before the broader economy. So are you believing the rally we're seeing right now on Wall Street?

DARRELL CRONK: Yeah, good morning, Alexis. Great to be here. So it is a little bit odd. This is the first time we've had a back-to-back rally in consecutive days for 15 trading days in a row.

So typically, we were back and forth almost every day, depending on the sentiment. You know, I think the combination of certainly better coronavirus stats and news out of Europe and, of course, New York yesterday, the combination of possibly an OPEC deal by maybe even as quick as the Thursday, and then also discussions about what's going on in Washington, DC, and maybe brewing for a phase 4 type stimulus has the markets feeling certainly upbeat at this point.

BRIAN SOZZI: Darrell, Brian here. Good to talk with you again.

DARRELL CRONK: Thank you.

BRIAN SOZZI: So is this a new bull market or a face-ripping bear market short squeeze?

DARRELL CRONK: [CHUCKLES] I like how you phrased it, Brian. So we still think that we'd be careful here and fade this. You know, the-- typically on these types of waterfall declines like we experienced, which was, you know, a 34% S&P peak-to-trough decline in 23 days, the fastest we've ever seen, the deeper the decline, the higher the bounce and the deeper the retest is kind of the history behind it.

If you go back and look all the way to 1929, we've had 13 of these waterfall declines. 9 of the 13 have retested the first or initial low and broken it. And of the four that didn't, three of those four actually retested the low again.

So I would be careful here. I know there's some good news. And I'd love to be an optimist myself. But I think it's important to be a clear-eyed realist.

We have some tough data that's coming up in front of us. I mean, we've seen the labor data. We're heading into first-quarter earnings season that's going to be difficult. So I'd just be cautious about getting too optimistic here on this rally.

ALEXIS CHRISTOFOROUS: Darrell, how do investors decide when to begin repositioning their portfolios for an eventual recovery? Because if you start doing that while the recovery is underway, chances are you've already missed it.

DARRELL CRONK: Yeah, it's a great point, Alexis. So if history is any guide, let me just give you a couple of statistics. The average recession, which we fully believe we're in, is 13 months. And the average bear market is 20 months.

We're only about 30 days into this, right? So I think you have to be careful that you don't-- it would be very unprecedented and unusual to have a bear market or a recession last 30 or 45 days. It just doesn't happen.

If history is any guide, again, the market tends to bottom about three months before you exit the recession. And so we're looking for three things. One is a discernible peak in the number of reported COVID-19 cases, right? And there is some good data there. I'm not sure we're completely through it yet, but some good data to at least kind of check that box in a yellow or maybe fading to a green.

A reversal in investor positioning. So we needed to see all the deleveraging take place. We needed to see some of the capitulation. We now have things like the AAII survey, that registers more bears than bull. So we're getting close there, right?

And then the third one, which we don't think we've got to yet, is recession-like pricing across financial assets. So just for example, we're heading into this first-quarter earnings season. The consensus still has us-- earnings declining about 7%, 8%, 9%. And second quarter is about 15%, 16% right now. That's way too low for what we're going to have in GDP contraction.

The financial crisis didn't contract as much as what we're expecting this one to. And yet earnings dropped 40% in the financial crisis. So I think you've got some markdowns still ahead on earnings that the market hasn't been as realistic about as they should be.

ALEXIS CHRISTOFOROUS: You know, Darrell, do you think it's fair to compare this recession, which I think many would agree we're already in, to past recessions? Because this is just so unique unto itself, right? I mean, at the heart of this recession is not a financial issue. It's a health crisis. So, you know, is there that possibility that when we come back, it will be faster than we've seen in prior instances, just because of the nature of this downturn?

DARRELL CRONK: Indeed. And I think that's an excellent point, Alexis. So this one is unique in a couple sense. Number one, it isn't driven by financial excesses, which is usually the driver of most recessions. It's driven by a biological issue, which the biological cure becomes the economic disease, right, in so many cases.

And the good news is when we reopen, you'll have pent-up demand on the other side, quite a bit of it, quite frankly. And also, you've got unprecedented stimulus, right, that's going to hit the economy. So there's good reason to believe that this one could be a very-- a short but very deep type recession.

The important note, though, here, or the countervail to this argument, is we've never seen a period in the economy where we've shut the entire economy down. I mean, even the '08-'09 crisis, you know, was-- the epicenter was in the real estate and the banking industry, not the entirety of the economy. Certainly, in the tech bubble, it was technology. In the 1990-91 recession, it was commercial real estate.

So recessions typically get centered around a sector, a industry, a group where that excess takes place. And then it cascades into the rest of economy. In this case, we've shut the whole economy down virtually for some period of time. So it truly is unprecedented.

BRIAN SOZZI: Darrell, what do you tell clients interested in getting into European assets? I look at Germany's DAX index, that market has rallied 20% off the lows. That means people have already missed-- I'm sure a lot of people have already missed a 20% move.

DARRELL CRONK: Yeah, Brian, so right now, tactically we are underweight or unfavorable on Europe and developed market equities. We just don't see the growth returning there. We think the US was the best and strongest economy coming into this recession. We think it will emerge the same way.

So we would fade Europe right now. Even though you're getting a nice kind of retracement, maybe even some short covering, the growth is just not there. And you've got serious concerns that the ECB is doing enough, and that that grouping of those nations is going to hold together. The fabric is very thin right now between them.

ALEXIS CHRISTOFOROUS: Darrell, what about some sectors? We know retail has been hit hard. But are there quality retail names that should be in a diversified portfolio right now?

DARRELL CRONK: Yeah, there can be. I think if you look at some of the consumer discretionary names that are more indexed towards, for example, like housing or just regular spending, everyday spending, that probably makes some sense. We like, Alexis, information technology as a favorable. We like consumer discretionary as a favorable. We like communication services as a favorable.

We would fade places like energy, industrials, materials, areas in the economy that had kind of bad earnings profiles and bad growth coming into this, and are only going to get hurt even more. And, in, fact that's helped our portfolios pretty materially. Those former three have all outperformed during this bear market. And the latter three have all underperformed during this market.

BRIAN SOZZI: Darrell, you note that investors should stay defensive. And one of the hallmarks for a lot of these defensive stocks-- well, I mean, look at consumer staples-- is that they pay dividends. But we're already seeing companies cut their dividends. Do you think that old-school axiom of buy defensive, they pay dividends is coming at a risk now? We could see a lot more dividend cuts across sectors this earnings season.

DARRELL CRONK: Yeah, I think you're spot on, Brian. And I think that's exactly what-- when you think about what should we be watching for in this earnings season, right now you only have 4 of the 11 sectors that are even going to post positive earnings growth, in our opinion. Seven are going to post negative.

We think a lot of companies are going to suspend guidance. Some have already, but even more will do so in the earnings season, just because they won't have transparency into Q2 and Q3. And then to your good point, there's going to be, we think, an unprecedented amount of buyback suspensions and dividend suspensions in this earnings season, which, you know, certainly the market is not unaware of. But I think the amount of it will probably surprise to the downside.

ALEXIS CHRISTOFOROUS: Darrell Cronk, Wells Fargo Investment Institute's president. Great conversation. Good to have you with us this morning.

DARRELL CRONK: Thank you, Alexis. Thank you, Brian.