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


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.

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