Morgan Stanley’s chief U.S. equity strategist Michael Wilson would be my pick for the most accurate market forecaster in the past 18 months. Apparently, he feels similarly, as he took a bit of a victory lap in his weekly report.
The consistent underperformance of small cap and lower quality stocks since mid-March indicates to Mr. Wilson that his “mid-cycle transition narrative has been playing out nicely.” Monday’s market volatility also fits the strategist’s expectations, as he has been warning that the shift from early cycle outperformers to mid-cycle often features an equity market correction of up to 20 per cent.
Morgan Stanley is recommending that clients play defence in their portfolios, which investors may at first find a bit premature with global economies still in the process of re-opening. Mr. Wilson, however, believes we have seen the peaks in terms of economic growth expectations and upwards earnings revisions. The decline in profit growth forecasts to more normalized levels is particularly important, as disappointing forward guidance often leads to stocks being re-rated lower.
Mr. Wilson has upgraded consumer staples stocks to overweight, which even he admits is boring, and downgraded materials stocks to neutral. He added Oreo cookie and Philadelphia cream cheese provider Mondelez International Inc. to his “Fresh Money Buy List” (full list posted on social media here).
As a firm, Morgan Stanley believes the current market cycle will be characterized by extremes and speed. Mr. Wilson’s U.K.-based colleague Andrew Sheets describes this pattern as “normal, strong and short.” It will proceed the same way as previous cycles, but there will be bigger economic and asset price swings, and it will happen quicker.
We’ve already seen equity markets change emphasis at bewildering speed. The six months after the March 2020 market bottom saw technology companies and other sectors not sensitive to economic growth outperform. November 2020 to March 2021 period was market by a powerful value stock rally that included most commodities.
Now we’re in a mid-cycle environment, historically typified by higher quality, dependable growth stocks leading the market. Who knows how many months this lasts. The only stage left is late cycle, and then the next recession hits. Mr. Wilson’s suggestion to position portfolios more defensively becomes more attractive with this perspective.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Canadian Net Real Estate Investment Trust (NET-UN-X) This REIT is on the cusp of entering correction territory with its unit price down nearly 10 per cent from its record closing high reached last month. It is a security that may be of interest to investors seeking reliable income, especially given the recent pullback, Jennifer Dowty says in this profile.
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The Financial Times: European shares come in from the cold
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- Francis
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--Nancy Woods, vice-president & portfolio manager with RBC
What’s up in the days ahead
Dr. George Athanassakos will return with another stock pick from his value investing students.
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Compiled by Globe Investor Staff