MORGAN STANLEY: A historic shift is taking place under the market’s surface. Here are 5 reasons why it will redefine the investing landscape as we know it.
10-year Treasuries have risen in recent days. Morgan Stanley's Mike Wilson thinks it's a trend that's set to continue. In a recent note, Wilson laid out why he thinks so, and how to position your portfolio amid a coming market correction. Click here to sign up for our weekly newsletter Investing Insider. Visit Business Insider's homepage for more stories.
After plunging from their pre-pandemic levels of 1.8% to as low as 0.5%, yields for 10-year Treasury notes have started to climb again in recent days towards 0.8%. For Morgan Stanley's Chief US Equity Strategist Mike Wilson, the shift is no small development. "The 33% increase [in 10-year Treasury yields] in 5 days is the third largest on record," Wilson said in an Aug. 17 note. "The two largest moves occurred in March and early June of this year. We don't think this is a coincidence and may be indicative of a bigger shift under the surface that is largely underappreciated." The shift Wilson speaks of is the start of a sustainable upward path for back-end rates — or yields for bonds issued for durations of 10 years and longer. While the change would be a sign of economic health, it can hurt some equity valuations as investors rotate from stocks back into bonds where they can once again find meaningful yield. Wilson lists a number of reasons why he believes 10-year yields will continue to rise (meaning the bond prices will fall) in the coming months and years.
The stronger monetary and fiscal policy responses from the Federal Reserve and Congress compared to those during the Great Financial Crisis over a decade ago will support an economic recovery, the note said. A second, and perhaps larger, round of stimulus from Congress will also support this rebound and could signify that deficits have become a structural part of the US economy. Further, last week's auction for the 30-year bond saw weak demand after the Treasury Department increased the size of its offering to a record. Wilson also said the Fed could reach "peak dovishness" — or their limit on supporting markets — at their next meeting Sept. 15-16, if they set a target for average inflation. This could result in longer-term yields dipping, because they would no longer be forced to rise corresponding with expected future inflation. Lastly, the recent rise in cyclical and defensive stocks could signal a coming rise in 10-year yields. Wilson pointed out that cyclical and defensive stocks led the way in late 2018 when yields fell and were followed shortly after by 10-year notes.
Again, Wilson argues that if a further rise in 10-year yields is indeed imminent, it could be harmful to portfolios. "Such a rise could prove to be very challenging to many equity portfolios that likely embed higher long duration risk than may be appreciated," Wilson said in the note. "If such a scenario unfolds, we think it could lead to a correction in the primary equity indices given the long duration nature of all equities and revaluation that has occurred due to falling rates," Wilson continued. Still, he added that such a correction would be followed by a bull market, as rising 10-year (and longer) yields would be a sign of economic growth and inflation. In the event that 10-year yields do continue their rise — though it would likely mean a broader market correction — Wilson laid out five stock-market sectors that would be positioned to benefit from the shift. These include banks, diversified financials, capital goods, energy, and materials, Wilson said. Meanwhile, sectors like utilities; food, beverage, and tobacco; real estate; household and personal products; and food and staples retailing would be worst-positioned. "While this result is not all that surprising, the correlations to real yields and breakevens among these groups are worth noting. Cap Goods, Energy, and Materials are more levered to higher breakevens, whereas changes in real yields are really not significant in terms of explaining relative performance," Wilson said. "Meanwhile, Financials tend to benefit when either breakevens or real yields rise."SEE ALSO: MORGAN STANLEY: The government's recession response has the stock market heading for a massive upheaval. Here's your best strategy to capitalize on the shift. Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
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MORGAN STANLEY: Stocks could fall another 9% as the new bull market faces a rising tide of risks — and these 2 cyclical sectors are the best long-term trades to take advantage of
Summary List Placement Monday was the stock market's worst day in a month, and more days...Summary List Placement Monday was the stock market's worst day in a month, and more days like it could be on the way. Morgan Stanley Chief Investment Officer and Chief US Equity Strategist Michael Wilson says that between now and early November, stocks have about twice as much downside as they do upside, as his trading range of 3,100-3,550 implies a drop of about 9% while he sees upside of only about 4%. He notes that as the election draws closer and doubts about the next round of economic stimulus grow more intense, the S&P 500 has failed twice recently to break through the 3,550 mark. After a powerful run in August and September, it hasn't made a new high in about eight weeks. "Political uncertainty along with the second wave of COVID-19 has pushed equity volatility higher," he wrote in a note to clients. "This technical failure is not the end of the bull market, but it does suggest that level of resistance is formidable and will be difficult to surmount in the near term." Even if things get rocky, Wilson says investors should be opportunistic and think about what will come after these fears subside. "We recommend taking advantage of any near term correction in the headline index to add to investment in areas that are likely to be the biggest beneficiaries of the economy reopening further next year," he said. Wilson says they can make good money by investing in businesses and sectors that are still struggling, but are going to get back to something approaching normal in 2021. "There are changes afoot that will require significant investment as the world demands better and safer ways of doing things," he wrote. "One such area is infrastructure where the world has underinvested for years ... we think this is one very attractive investment opportunity today." That could be a huge benefit to industrial companies and to companies in the materials sector as well — especially companies that mine and deal in base metals such as copper. Wilson adds that a strong recovery in demand and a global infrastructure investing trend would both contribute to higher prices in some markets and more long-term inflation. That, too, would be helpful for industrial and materials stocks and for other cyclical companies such as financials. Investors interested in Wilson's ideas can implement them using exchange-traded funds. Top-performing ETFs linked to the industrial sector in 2020 include the First Trust RBA American Industrial Renaissance ETF, Invesco DWA Industrials Momentum ETF, and the iShares Transportation Average ETF. High-performing materials ETFs in 2020 include the Sprott Junior Gold Miners ETF, Global X Copper Miners ETF, and the iShares MSCI Global Silver and Metals Miners ETF. Read more: GOLDMAN SACHS: Buy these 13 unloved vaccine stocks that have the potential to spike on positive treatment updates World-beating fund manager Mike Trigg is bringing in huge returns by investing in 3 high-growth areas his peers neglect. He shares the keys to betting on each. A fund manager who's doubling up the competition in 2020 tells us his strategy for investing in the 'K-shaped' economic recovery — and details the only 2 stocks he added as the market recovery took off SEE ALSO: BANK OF AMERICA: Buy these 11 underowned stocks ahead of their earnings reports because they're the most likely candidates to beat expectations in the weeks ahead Join the conversation about this story » NOW WATCH: July 15 is Tax Day — here's what it's like to do your own taxes for the very first time
Goldman Sachs breaks down the 5 forces that will shape US stock-market demand in 2021 as investors put stockpiled cash to work
Summary List PlacementEquity allocations have rebounded to their highest levels in two years at 47% of...Summary List PlacementEquity allocations have rebounded to their highest levels in two years at 47% of total financial assets, just below the tech bubble peak, which sat at 51%, said Goldman Sach's equity analyst Arjun Menon in a recent client note. Menon and his colleagues in the portfolio strategy research team released a new report exploring existing equity demand and forecasting supply and demand for equity in 2021. The team made five concrete predictions. The outcome of the US elections is a prominent theme across the predictions with the potential of a so-called blue wave acting as a risk factor for some predictions. "We expect overall equity allocation will climb in 2021," Menon said. "The increase will likely be driven, in part, by a continued rotation away from cash. Although money market funds have experienced outflows during the past month, allocation to cash remains higher than its early 2020 levels and would have to decrease by another $3 trillion to reach its recent lows, all else equal." Predictions Prediction 1: Foreign investors will be the biggest buyers of US equities in 2021 Foreign investors have been the largest buyers of US stocks this year. This is a trend that Menon sees continuing into next year. "Foreign investors bought a total of $317 billion of US stocks in 1H, driven by investors in Europe, the Middle East, and Japan," Menon said. "Following two consecutive years of selling, investors in China were also net buyers of US stocks in the first half of 2020 (+$29 billion)." Foreign investors will purchase $350 billion of US equities in 2021 alongside a weakening US dollar, Menon said. "A weaker-than-expected US dollar and reduced tensions with China could drive higher foreign investor demand for US equities than our baseline forecast," Menon said. However, under a "blue wave", higher corporate tax rates in the US and increased regulatory uncertainty could create potential headwinds in investor demand, Menon said. On the other hand, US investors are expected to purchase $200 billion of foreign equities in 2021, Menon said. The annual average US investors spent on foreign equities was $120 billion over the last 10 years. Prediction 2: US households will buy $100 billion of US stocks in 2021 US households are more than just retail investors; they include nonprofits, domestic hedge funds, private equity funds and personal trusts. Goldman Sachs predicts that US households will buy $100 billion of US stocks in 2021. However, it also expects that the top 1% will continue to be the biggest driver of total demand. "The top 1% has by far been the main source of equity demand from households during the past 30 years." The top 1% of the population have the majority of household equity ownership, owning $23 trillion -- a near all-time high. For comparison, the bottom 90% own $5 trillion. Although, a "blue wave" could be a risk to this prediction. If there was to be a Democratic sweep, the democrats are likely to increase the capital gains tax rate, which could push wealthy households to sell equities, Menon said. However, he also noted, in 2013 when the rate was increased, in the following months the top 1% bought back more than what they had sold prior to the hike. Goldman Sachs economists are also predicting faster economic growth under a Democratic sweep, which they believe will boost household purchases of US equities next year. Prediction 3: Assets under management will continue to shift from active investing to passive investing In 2021 there will be net selling of $200 billion by mutual funds and $250 billion of purchases through exchange-traded funds, Menon forecasts. "We expect the secular shift in AUM from active to passive management should persist and drive continued mutual fund selling and ETF inflows next year," Menon said. "Rising equity prices and record low US equity mutual fund cash holdings (1.9% of AUM) should also weigh on equity demand from active managers." Despite passive funds experiencing large outflows in the months following the equity market trough, the funds are now seeing a trend of inflows of around $36 billion, Menon said. Prediction 4: Pension funds will be net sellers of US equities in 2021 Pension funds generally sell equities and buy bonds during periods of rising interest rates, Menon said. With interest rates expected to gradually rise, Menon expects that it will drive $250 billion of net selling next year. "2020 marks the first year that pension funds have been net buyers of stocks since 2008," Menon said. "Pension funds bought $146 billion of stocks in 1Q as equity prices plummeted. In fact, excluding the 1998 correction, pension funds have purchased equities during each of the 13 US equity bear markets since 1950." A "blue wave" would increase the chances of pension funds selling equities next year; Goldman Sachs' interest rates strategists expect the 10-year US treasury yield to rise more under Democrats than under a divided government. Prediction 5: Net corporate purchases of US stocks will surge by 100% to $300 billion in 2021. In 2020, net corporate purchases dropped 70%, according to the report. The opposite is expected to happen in 2021. Goldman Sachs is expecting net corporate purchases of US stocks to surge by 100% to $300 billion in 2021. "A double-digit increase in gross buybacks and a normalization in equity issuance from its record high levels this year suggest that net corporate demand for shares will rise in 2021," Menon said Rebounds in corporate earnings combined with reduced uncertainty and low interest rates should support a rise in gross buybacks in 2021. But Menon forecasts lower buyback executions because of restrictions on the financial services industry and the negative rhetoric around share repurchases. "S&P 500 companies have authorized $204 billion of buybacks YTD, 66% lower than the same time last year," Menon said. One reason Menon and his colleagues believe there will be increased corporate demand for shares next year is that gross equity issuance has reached an all-time high this year, which includes SPACS, and it is likely to normalize next year to the consistent levels seen across the years before the pandemic. Generally, equity issuance was between $200 billion to $250 billion, previously.Join the conversation about this story » NOW WATCH: What living on Earth would be like without the moon
3 reasons why the current stock market sell-off could be more than a normal correction, according to DataTrek
Summary List Placement The current sell-off in US stocks reached correction territory on Thursday, with the...Summary List Placement The current sell-off in US stocks reached correction territory on Thursday, with the S&P 500 falling as much as 10% from its September 2 high. The tech-heavy Nasdaq 100 index entered correction territory on September 8. While the current market sell-off could just be another "normal correction," investors should brace for the possibility of the opposite, DataTrek said in note on Thursday. Here are three reasons why the current market sell-off could be more than a normal correction, and instead could further accelerate, according to DataTrek. Visit Business Insider's homepage for more stories. Risk management is a core competency of many successful investors, as outsized long-term gains can come from limiting drawdowns in the short-term. But risk management is also hard, as investors tend to focus on the main catalyst that could start a sell-off in the market, and not the second- and third-order effects of an uncertain environment that catalyst would create, DataTrek co-founder Nicholas Colas explained in a note on Thursday. Therefore, while the current stock market sell-off may just be another "normal correction," investors should prepare for it to not be that. The S&P 500 briefly entered correction territory at its intraday lows on Thursday, as it fell 10% from its September 2 high. The tech-heavy Nasdaq 100, which led US stocks lower since its peak on September 2, entered correction territory on September 8. Here are three reasons why the current market sell-off could be more than just a normal correction, according to DataTrek. Read more: A Wall Street expert breaks down why these are the best 6 stocks to own for a second coronavirus wave in addition to the FAANMGs 1. "US Politics." There is a scenario "where a contested election locks up Washington for weeks or more and no matter which party wins the bad blood between them only gets worse," Colas explained. While in "normal times" this wouldn't matter, it does today since the US economy is weak and many are hoping for another round of fiscal stimulus from Congress. Colas noted that this has happened before, pointing to the period of October 2008 to March 2009, when the country was in the midst of a high profile US election amid a declining economy. US stocks didn't bottom until one month after the passage of a stimulus package that helped stabilize the US economy. 2. "COVID Next Round." "If – and this is a big 'If' – markets are starting to discount another wave of societal concern about COVID (which would hit consumer confidence and spending), that would put the [market] recent choppiness into an entirely logical context," Colas said. With COVID-19 daily cases on the rise in recent days, investors will likely want to have a backdrop of confidence that the government can help contain a second wave of the virus. This could be a challenge given point No. 1, according to DataTrek. 3. "Unknown unknowns." "As much as we've been bullish on stocks because we see a textbook cyclical earnings recovery on the way, we also understand that the global economy is fragile just now. That leaves little room for absorbing another shock, whether it be financial or geopolitical," DataTrek said. Still, DataTrek noted that the bullish argument that would dismantle all three points above is simple: A successful COVID-19 vaccine is developed, more fiscal stimulus will be passed, and the upcoming election will deliver a verdict and not be contested. "These issues are transitory rather than structural," Colas concluded. Read more: A Wall Street expert explains why the market's ongoing turbulence could end within 2 weeks — and pinpoints 3 stocks to grab cheaper now as big investors buy the dipJoin the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid