$9 billion money manager who called record run sees new highs ahead

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It’s the great rotation.

Investors have been pulling away from growth and defensive stocks — plays that tend to perform better during economic slowdowns — and moving into value names as market conditions improve and optimism starts to creep back into the investing community.

That could make for a rally to even higher highs for the major averages, says Avalon Investment & Advisory’s Bill Stone, who in January and February said the S&P 500 would reach new highs by year-end, a call that very much came to fruition.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite all closed at records Friday, with the S&P logging its fifth straight week of gains.

And, if you ask Stone, who is chief investment officer and managing director at Avalon, the rotation out of growth and into value is a major catalyst for these moves — and the ones to come.

“Value stocks had really been left in the dust. That rotation has kicked in. We’ve gotten much more of the cyclical names, the value names, acting better. I think that can help take us to new highs,” he said Friday on CNBC’s “Trading Nation.”

As for the things that kept stocks at bay for much of this year, namely worse-than-expected economic data, recession fears and the U.S.-China trade dispute, Stone maintained a fairly positive outlook.

On the economy, Stone, who “doesn’t see a recession” coming anytime soon, hoped to see more data that support the idea that “the U.S. and globally economy have kind of stabilized and hopefully put in a bottom here,” he said.

“That certainly helps,” the investment chief said. “And … connected to that is clearly the trade dispute. … Sometimes, we get headlines that maybe call some things into question, but, at the end, I think we are kind of moving toward at least a détente. And, frankly, détente’s enough.”

The spike in bond yields this week, while stark, also fed into Stone’s bull case.

“We’re right in that sweet spot” of just under 2% on the 10-year U.S. Treasury yield, Stone said. “Right now, [yields are] going up for a good reason, which is the belief that the global economy and the U.S. economy are getting a bit better. I think that’s really the nice part. I think the danger is if they go up for some other reason.”

The worst-case scenario is unlikely to play out, however, given the U.S. Federal Reserve’s indication following its latest interest rate cut that it will pause its policy moves for the time being, Stone said.

So far, he sees the friendly Fed and the rally to records as drivers keeping the market in a good place, which could extend into next year barring some newfound exuberance among buyers.

“It’s hard to say, with fund flows and everything else still being net-negative overall for the year, that people have been rushing in to buy a lot of stocks, so I don’t get too worried about things being too carried away,” Stone said.

As such, even if Wall Street estimates for 10% year-over-year earnings growth in 2020 don’t pan out, Stone could still see stocks climbing higher on the back of mid-single-digit earnings gains.

“Even if you can book some sort of a mid-single-digit number out of stocks next year, that’s still an attractive number versus what you’d ever earn out of bonds at the moment,” he said.

In that environment, Stone would take part in the flight to value, he said.

“I still like the value side of things,” the investor said. “Obviously, it’ll wobble and get hit whenever you get some sort of worries about the economy popping up, but I think if you believe, like we do, that we’re going to continue to see some better news out of the economy, I do think it’s the place to be because they are still relatively cheap.”

All in all, “I think people will continue to look for bargains there,” Stone said. And value? “That’s a good place to hunt.”

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