• Investment Management

How Much Can Fiscal Stimulus Rev Up U.S. Stocks?

Fiscal stimulus has the potential to boost some U.S. stocks more than others, says Morgan Stanley Investment Management’s Andrew Slimmon.

The U.S. stock market has surged to new all-time records in the first months of this year1, and there could be more to come, says Andrew Slimmon, lead manager for Applied Equity Advisors' strategies at Morgan Stanley Investment Management. Yet to be factored into stock prices is the potential impact that fiscal stimulus, tax reform or lighter regulations could have on the economy and certain market sectors. If any of those things appear likely, then certain stocks might benefit from another leg up.

The operative word being “certain”. Any further rally is likely to be driven by earnings improvement arising from fiscal stimulus, making 2017’s market very different from the past eight years. “When central banks were pumping money into the markets over the past eight years, most equities rose in value, whether a company’s fundamentals justified a stock price rise or not,” says Slimmon. “But the focus is now on earnings improvement arising from a company’s ability to benefit from fiscal stimulus and a resulting uptick in economic activity.”

He believes that being selective about positioning in an effort to capture the opportunities the market presents could benefit investors in the current market environment.

The Next Leg Up

Further earnings improvement could mean the market moves to the next leg of a bull market, says Slimmon. “I think investors have only recently reached the “confidence” phase of what we refer to as the investor psychology cycle.”

Higher-quality value stocks2, he says, have not yet run their course. “We’ve seen value stocks rally since February 2016, generating 12% of excess return, But looking at the last seven value cycles going back to 1990, the average value rally lasted 26 months and returned 29% of excess return. My take is that we have a ways to go yet,” he says.

As for the rest of the market, Slimmon continues to see good opportunities in growth stocks, and little opportunity for finding attractively-priced high dividend yielding stocks.

The big caveat, as always, is the economy. “We need the economy to break out of this current woeful period of subpar growth,” he says.  “If it does not, value could roll over and the market could as well.”

Slimmon, however, puts a lot of faith in the power that any deregulation by Trump’s administration could have on business sentiment. “The potential for a less hostile business environment, which could accelerate growth, could contribute to the market hitting new highs.”

Learn more about Morgan Stanley Investment Management