Morgan Stanley (MS, Financial) Chief Investment Strategist Mike Wilson made headlines back during the March selloff when he claimed that the market crash was actually the end of a multiyear secular bear market, and that he expected things to pick up significantly. At the time, this idea was dismissed by many, but since then there is at least an argument that he may have been right. In a recent research note, Wilson explained why so many people still disagree with him and what the implications of that are.
The end of the cycle?
Wilson says that his clients mostly believe that the worst is largely behind them. However, there is still some lingering skepticism about what shape the economic recovery might take. One of the main reasons for this skepticism is that a lot of investors seem to believe that the U.S. economy was not experiencing any significant problems prior to the lockdown. As mentioned above, it has been Wilson’s belief that this was not the case. He wrote:
“I believe that the U.S. economic cycle was very much showing its age last year, making it vulnerable to any shock, much less a global pandemic. What this means from an investment perspective is that many clients are still embracing a late-cycle playbook, as they view the current recession as an inconvenient interruption in an ongoing expansion. In short, they think that the recession we are experiencing is not a true end of the cycle. Therefore, they remain overweight high-quality large cap growth and defensive stocks, while still shying away from small caps and economically sensitive stocks that do better at the beginning of an economic expansion.”
In other words, a lot of the best investments of the last few years have become very crowded, so investors could benefit from looking further afield for better priced opportunities. The real opportunity is in going against the prevailing trend and looking for stocks that lie in industries that have thus far underperformed that market: small-cap businesses, banks, consumer durables, industrials and energy.
When it comes to energy in particular, the outlook for that industry is obviously heavily dependent on the price of oil. While demand is still weak due to the collapse in worldwide travel, there is some indication that the supply side of the equation is levelling out, with OPEC and Russia recently agreeing to extend their production cut agreement to the end of July. This is good news for U.S. shale producers, which are largely at the mercy of coordinated actions by oil-producing state monopolies like Saudi Arabia and Russia. With energy stocks still trading at relative lows compared to benchmark indexes, the sector might prove to be a good place to go looking for those better priced opportunities.
Disclosure: The author owns no stocks mentioned.
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