Morgan Stanley
  • Thoughts on the Market
  • Nov 30, 2020

A November to Remember

With Mike Wilson
U.S. Equities Research for Investors

Transcript

Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, November 30th, at 11:30 a.m. in New York. So let's get after it.

 

A month ago, markets were in a much different place as investors were fretting about the uncertainty surrounding the outcome of the U.S. election and the inevitable second wave of COVID-19. Fast forward to today, however, and markets appear to be worrying very little about much of anything. Part of this is due to the election having mostly been completed with the most favorable outcome the markets were hoping for: a divided government, assuming the Georgia Senate runoff leads to at least one seat remaining Republican. Such an outcome is being viewed positively, mainly because this means the 2017 corporate tax cuts will likely stay in place.

 

In addition, we received great news on the availability of two highly effective vaccines and potentially a third one, all of which should be available for mass distribution by the end of the first quarter. This means we are getting closer to the end of this ordeal and that markets can start to discount what a full reopening of the economy looks like. Needless to say, this will be very positive for many stocks, but especially those that have been hit the hardest by the pandemic and the subsequent lockdown.

 

The good news is that these are exactly the kinds of stocks we've been recommending for months. In fact, it wouldn't surprise me if regular listeners have grown tired of hearing me push small caps, consumer services, materials, financials, and industrials. If equity markets close today near current levels, November will be one of the best months on record. More specifically, the S&P 500 is now up close to 11% with the small cap Russell 2000 up more than 20%.

 

Truth be told, I didn't expect stocks to move this quickly back to the top end of our trading range, but we're happy to take it. Furthermore, it would be disingenuous for me to suggest that the risk reward of adding to equity positions hasn't deteriorated. Meanwhile, I've noticed that consensus seems to be getting more bullish as prices have risen. That's typical and not usually a good sign in my experience. The bottom line for me is that I would hold back on new purchases of stocks at this point. The risk reward is unattractive in the short term, even though we remain constructive on our outlook for the next 12 months.

 

Bull markets go in steps and often they need to reset before advancing again. This is one of those times, in my view, and I would not be surprised if we begin a third 10% correction since August very soon. These corrections often begin with the start of a new month. Use this pullback to add to existing positions, or new ones, depending on which stocks sell off the most. More specifically, we continue to recommend holding a barbell of reasonably priced growth stocks and ones that will benefit the most from the economy fully reopening next year. And yes, this would include small caps, consumer services, materials, financials, as well as reasonably priced healthcare and cyclically geared technology stocks.

 

Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show. 

Markets have spent November celebrating upbeat vaccine news and closure on U.S. election uncertainty. After a strong month, are equities headed for another reset?

Each week, Mike Wilson offers his perspective on the forces shaping the markets and how to separate the signal from the noise. Listen to his most recent episode and check out those of his colleagues from across Morgan Stanley Research.

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