Stimulus bill will be 'critical' to recovery and spur shift back to cyclical stocks, Morgan Stanley investment chief says
- Mike Wilson, Morgan Stanley chief US equity strategist and chief investment officer, said the next stimulus bill will be "critical" to the recovery.
- He believes the bill will get passed, and said the fiscal package will be a catalyst for back-end interest rates to go up.
- Once interest rates rise, a rotation back into cyclical stocks could occur, said Wilson.
Morgan Stanley's Mike Wilson told Bloomberg on Thursday that the presumption of a congressional stimulus bill being reached soon is "critical" to the recovery and will spark a shift into cyclical stocks.
The chief US equity strategist and chief investment officer, said he believes the package will get passed, and could potentially be as large as $2 trillion.
Investors looking to position themselves for this trade should own cyclicals and could adopt a barbell strategy, said Wilson. Own "COVID beneficiaries," as well as some of the stocks that have suffered from the pandemic, because "that is where the operating leverage is going to be the greatest."
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Wilson also said that the fiscal package will be a catalyst for interest rates to go up, which is the "key to all these trades." He further explained: "The fiscal package ironically could actually stimulate the perception that the economy will be better next year, rates shoot up, and that will affect that rotation back towards these COVID beneficiaries in the recovery stage, the cyclical type stocks that we've been recommending."
Wilson emphasized this rate increase will occur for back-end rates. The Fed has "front-end rates locked down, we firmly think they will stay there for the foreseeable future, definitely to fund these deficits," he said.
But back-end rates, however, are a function of inflation expectations and nominal GDP growth. Wilson thinks GDP growth will be better next year, causing a "big move in back-end rates."
"It would help their cause to get more inflation in the system because if you create some steepness in the yield curve, it encourages lending, which is how money supply is created and then you get inflation," he said. However, he added, "The only way rates can go up in a healthy environment is if the economy continues to improve ... If rates start going up because the economy is better ... that should be conducive to what Fed is trying to achieve," Wilson added.
Morgan Stanley also recommends investors be overweight on financials. Wilson said this recommendation is "contingent on the fact that back-end rates will go up ... assuming the fiscal package gets passed we think the economy can easily handle rates above 10%."