The U.S. stock market has undergone a major shift over the past few weeks. Previously, defensive stocks led a cautious rally, and everyone was waiting to see whether investors would start pouring money into the riskier cyclical stocks as well to confirm that the rally was on.That finally happened in August, but with the market weakening a bit last week, investors are wondering whether the rally in cyclicals can continue.
Morgan Stanley chief U.S. equity strategist Adam Parker said in a note to clients this morning that there are two catalysts left that he thinks can extend the rally:
The last three or four weeks, the microstructure has changed. The best three performing sectors in the market over the last few weeks have really been energy, industrials, and tech. The worst three have been staples, utilities, and health care – clearly more of an offensive, cyclical trade than we saw earlier in the rally.
What makes the [valuation] multiple expand more from here, it’s hard to see – other than some election contagion or maybe a reversal in China. I think those are the two main things that could catalyze a more pro-cyclical view. The one sector that really hasn’t worked yet with any kind of relative bet is financials. So, I’m trying to watch whether money flows there as sort of the last bucket to get filled with the water.
Parker discussed how one of the other drivers of the stock market rally was concern – with all of the big policy events on the calendar between central bank meetings and the presidential election – that investors would miss a rally sparked by policy. So, if the market started to see the outcome of the presidential election as more favourable for stocks, Parker thinks it could help light a fire under the market.