Investors have shifted into cyclical assets lately as COVID-19 vaccines are on the way and the economy gets set to recover.
"Recoveries create rotations, but with those rotations now fully in gear, it may be time for a near term pause," Morgan Stanley US Equity Chief Strategist Mike Wilson wrote in a December 7 note. "While this recession and recovery have been following our playbook to a 'T', we have noticed it's happening faster than normal."
"I do think this will last more than a couple of years. I think this trend back toward cyclicals and what I would say are economically-sensitive stocks in general, that leadership probably will last longer than what people are expecting," he added. Still, Wilson is not completely bearish on cyclicals, which may still outperform following any near-term drawdowns. , and ought to wait for these pullbacks to add to broader cyclical positions. More specifically, Wilson laid out four themes investors can follow as a guide for finding the returns still to be had in cyclicals. "This pair only troughed recently and has had a 13% relative move off its trough," Wilson said, referencing the performance of value stocks compared to growth.
He added: "This suggests further upside surprise in a particularly strong economic upswing, in line with our house forecasts, is still a strong possibility and makes non-Tech cyclicals the area we would focus on for new purchases in pullbacks.". This is despite the fact that upside in the near-term is priced-in, he said.
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