Latest from Morgan Stanley Shorter-duration cyclical stocks should get a boost from better growth and higher interest rates – hence the rotation we have been witnessing in the equity markets from the Nasdaq to the small-cap Russell 2000 over the past few months as markets contemplate a full reopening of the economy. We think this rotation has further to go if we are right about the economy and rates (Exhibit 1). Bottom line, as we look forward to a more normal year in 2021, we expect US equities to remain firmly in a bull market. In the near term, stocks are elevated and may have to contemplate a second wave in the absence of a fiscal deal and before the vaccines can be widely distributed.
The real opportunity next year for investors is likely to take place below the surface in smaller-cap stocks that have greater sensitivity to what is likely to be a very strong economic recovery. Along these same lines, financials, consumer services, materials, industrials and cyclical technology stocks should do best.
