US managers back cyclicals after Dow Jones’s historic high

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The week's rally in US equities has given fund managers new confidence to invest in riskier growth-orientated stocks.

The Dow Jones index reached its highest level ever on Tuesday, buoyed by ultra-loose monetary policy and better economic prospects.

'The rally reflects both fundamentals and easy money,' Margie Patel, manager of the Wells Fargo Advantage Diversified Capital Builder fund, told Citywire Global.

'American business over the past decade has fundamentally transformed operations with more flexible cost structures. The near zero rate policy of the Federal Reserve makes equities attractive on a cash flow and dividend basis.'

The Federal Reserve's $85 billion monthly bond-buying program was freshly endorsed by comments from a senior Fed official this week that loose monetary policy would continue until the US' economic fundamentals improved.

'The rally's been hugely backed by the Fed that is offsetting what’s not been done by the politicians,' said Mark Phelps, manager of the US equity fund WP Stewart Holdings.

'We’ve been thinking that the market will go higher for a while now. If we do see investors move out of fixed income rather than just use cash positions to buy equities - who knows where the index could go,' he added.

Both Patel and Phelps are backing cyclical stocks such as financials, tech stocks and health care stocks, to outperform this year.

The rally boosted all but three of the thirty companies listed on the Dow Jones index following the $85 billion in spending cuts that were announced by President Barack Obama last Friday.

'It is not surprising that the highs have been made after the cuts were announced—while the cuts may have a mild short-term negative effect on economic growth, the prospect of even a modest reduction in the rate of government expenditures is quite bullish for longer term economic growth,' added Patel.