(Bloomberg) Citigroup Inc.’s Tobias Levkovich is known as a bear in these heady times for U.S. equities, anticipating a 10% slide for the S&P 500 by yearend -- with the decline starting as early as next month. But he still favors some stocks.
“We do like capital goods, we do like consumer discretionary, but very specifically within retailing consumer services. We’re not chasing consumer durables, we’re not chasing autos,” Citigroup’s chief U.S. equity strategist said in an interview on Bloomberg TV’s Surveillance on Wednesday. “And then we like financials. We like banks, we like insurance. Those are more value, cyclical-oriented groups.”
Citigroup sees a change in the current direction of financial markets, with the 10-year Treasury yield creeping back toward 2% from nearly 1.19%, and the S&P 500’s year-to-date gain of about 17% being trimmed. Levkovich explained the link between the two asset classes.
“Bond yields have had an enormous impact on how you think about growth versus value,” he said. “Central banks globally have been keeping suppressed rates really since 2008. That suggests they don’t have confidence in long term, sustainable durable growth. The U.S. is a heavy growth market. If you believe bond yields are going to edge higher, then growth stocks are going to take it a little bit on the chin.”
Levkovich said there’s “some potential for volatility,” and reiterated his views from a June note to clients, identifying the “four catalysts that are disconcerting for us that possibly could all coalesce around September.” These potential drivers would be: the Federal Reserve’s discussion on tapering monetary stimulus, inflation worries, pressure on profit margins and corporate tax hikes.
“The complacency out there when we talk to investors on a qualitative basis is very palpable,” Levkovich said.
