US economic cycle to be shorter in duration; Wall Street investors may need to switch stock strategy

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Updated: Mar 17, 2021 12:12 PM

The US economy is now in an expansion cycle but this period of economic growth is likely to be shorter than the previous three witnessed by the country.

Stock market, NASDAQIn the current cycle, economists at the global investment bank see the real GDP returning to its pre-covid growth path in the third quarter of 2021. (Image: REUTERS)

The US economy is now in an expansion cycle but this period of economic growth is likely to be shorter than the previous three witnessed by the country, Morgan Stanley analysts said in a note. This shorter cycle warrants investors to position their strategies accordingly but equities are not expected to run out of favour. “A rapid economic recovery and an emergence of inflation after a 30-year absence mean this cycle could be shorter than the prior three, in our view. We think risk-asset leadership is already shifting from ‘early cycle’ to ‘mid-cycle,’ and that investors should position accordingly,” the note added.

Shorter economic cycle

In the current cycle, economists at the global investment bank see the real GDP returning to its pre-covid growth path in the third quarter of 2021. The fast speed of recovery is expected to result in shortening the runway for this cycle when compared with the last three US expansions that lasted for 127, 72, and 119 months, respectively. Morgan Stanley analysts predict that the current economic cycle will last just 42 months. 

“We’re in a new cycle, and we think from a top-down, high-level perspective, the reflation playbook of continued overweights in equities and credit against underweights in government bonds and cash still makes sense,” the note said. However, the shorter duration of the cycle means a faster shift from ‘early cycle’ to ‘midcycle’ to ‘late-cycle’. They further added that currently, Wall Street is in the ‘repair’ (early-cycle) phase, but given the speed of rebound, the next phase ‘recovery’ (midcycle) could be reached around the fourth quarter of this year. “Given that equities often tend to discount macro regime shifts months in advance, we believe it is time to start thinking about a rotation from ‘repair’ leadership to ‘recovery’ leadership,” Morgan Stanley said.

How to trade

To play the ‘recovery’ trade, analysts recommend adding to ‘recovery’ outperformers with relatively attractive fundamentals — earnings upside at relatively reasonable valuation levels. Autos, Retailing, Consumer Durables, and Cap Goods look most attractive to Morgan Stanley analysts. 

Investors have also been advised to add ‘recovery’ outperformers (versus the Russell 3000) with below-benchmark price/2022 EPS ratios and above-benchmark long-term consensus EPS growth. Some of the largest companies, by market capitalization, recommended by Morgan Stanley here include; Deere & Company, Qualcomm Inc, Bed Bath & Beyond, Lowe’s Companies, Micron Technology, Applied Materials, Lam Research Corporation, and Fiserv among others.

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