Our CIO and Chief U.S. Equity Strategist explains his
preference for cyclical stocks amid a rise in global money supply
and current US election dynamics.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief US Equity Strategist. Along with my
colleagues bringing you a variety of perspectives, today I'll be
talking about our recent upgrade of quality cyclicals and how it
will be affected by the US election and liquidity.
It's Monday, Oct 21st at 11:30am in New York.
So let’s get after it.
We continue to have conviction in our recent cyclical shift and
Financials upgrade. Indeed, cyclicals traded well last week as
most economic data came in stronger than expected. It’s worth
noting we recommend investors stay up the quality curve within
the cyclical space, however. While Financials have been the best
performing sector in the S&P 500 since our upgrade,
institutional investors remain under-exposed to Financials based
on our data suggesting the sector can run further.
In addition to better economic data, there are other factors
affecting pro-cyclical stocks. We are focused on two, in
particular. The election and global liquidity.
We believe a Trump win with a split Congress would provide a
pro-cyclical bias with small caps keeping pace with large caps.
The markets seem to agree, with the recent cyclicals
outperformance led by financials. Meanwhile, consumer stocks
negatively exposed to tariff risks under a Trump win have
underperformed. Interestingly, there is some overlap between this
recent leadership and the post Biden debate period in early July
as well as the months surrounding the 2016 election. Finally,
we've also witnessed higher interest rates and a stronger US
Dollar more recently, which is something to watch closely as a
possible headwind for liquidity post election and into
2025.
While some argue a Trump win would be a headwind for growth and
equity markets, due to tariff risks and slower immigration, we
think there's an additional element from the 2016 experience
that’s worth considering—rising animal spirits. More
specifically, in 2016 Trump's pro-business approach led to the
largest three-month positive impact on small business confidence
in the past 40 years. It also translated into a spike in
individual investor sentiment. It appears to me that markets may
be trying to front-run a repeat of this outcome as Trump's win in
2016 came as a surprise to pundits and markets alike.
This also means a Harris win could lead to some reversion in
terms of overall equity market performance and leadership. Most
notably, bonds could potentially rally with defensive
and quality growth stocks doing better like earlier this
year. Secondarily, even with a Trump win, certain areas of the
market may be vulnerable to a ‘sell the news’ phenomena if the
upside is already priced amid bullish positioning.
On this front, we would also point out that the economic set-up
today is very different than the 2016 period when the economy had
much more slack and could absorb additional pro-cyclical policies
like tax cuts or other forms of fiscal stimulus.
Turning to liquidity, we note that global money supply in US
dollars has surged at an 18 per cent annualized rate since the
end of June. I believe this has also had a positive effect on
equity prices, not to mention credit spreads, precious metals,
cryptocurrencies and real estate.
Bottom line, in the absence of a major swing in election
probabilities or global liquidity between now and the election,
equity markets are likely to trade with a bullish tilt both at
the index level and from a style, sector, factor
standpoint.
Thanks for listening. If you enjoy the podcast, leave us a review
wherever you listen, and share Thoughts on the Market with a
friend or colleague today.
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