US business cycle to be shorter; Wall Street investors may need to change their equity strategy

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

The US economy is now on a cycle of expansion, but this period of economic growth is likely to be shorter than the previous three the country has seen. Morgan Stanley Analysts in a note. This shorter cycle warrants investors repositioning their strategies accordingly, but stocks are not expected to decline in popularity. “A rapid economic recovery and a rise in inflation after a 30-year absence mean that, in our opinion, this cycle could be shorter than the previous three. We believe that risk asset management is already shifting from ‘early cycle’ to ‘medium cycle’ and investors should position themselves accordingly, ”added the note.

Shorter business cycle

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

“We are in a new cycle, and from a top-down, high-level perspective, the reflation playbook of the continued overweighting of stocks and credit versus the underweighting of government bonds and cash still makes sense,” the press release said. However, the shorter duration of the cycle means a faster change from the “early cycle” to the “medium cycle” to the “late cycle”. They added that Wall Street is currently in “repair” (early cycle) but given the speed of recovery, the next phase of “recovery” (mid-cycle) could be reached around the fourth quarter of this year. “Given that stocks often tend to discount changes in the macro regime months in advance, we believe it is time to think about a rotation from ‘repair’ leadership to ‘recovery’ leadership,” said Morgan Stanley.

How to act

To play the “recovery” trade, analysts recommend adding “recovery” outperformers with relatively attractive fundamentals – earnings increases at relatively reasonable valuation levels. Cars, retail, durable goods and cap goods appear to be the most attractive to Morgan Stanley analysts.

Investors were also advised to add “recovery” outperformers (versus the Russell 3000) with below benchmark / 2022 EPS and above benchmark long-term consensus EPS growth. Some of the largest companies by market cap 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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