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With a US fiscal stimulus deal looking more likely, the risk of long-term interest rates moving higher has now increased – a shift that could benefit recovery stocks, according to economists at Morgan Stanley.

See – US Elections: Quicker election resolution to be a catalyst for yield curve steepening – Morgan Stanley

Key quotes

“Intermediate-term, our view on the recovery remains decidedly positive. The V-shaped recovery we expected is playing out in the data and markets. We think the market is much more realistically priced at this point and would describe the S&P 500 close to ‘fair value’ at current prices and right in the middle of the 3100-3550 range we expect the index to trade for the rest of the year.”

“The market most mispriced for the ongoing recovery we expect is the back end of the Treasury curve or long-term interest rates. This means expensive growth stocks are still vulnerable in our view. With a fiscal deal still looking likely, in our view, either before or after the election and the growth scare now somewhat priced, the risk for rates to move higher is greater. By definition, that increases the risk of a move lower in those assets most tied to long-term interest rates.”

“The rates market will quickly discount what the stock market and other asset markets have been saying all year, that the recovery is on solid footing and is likely to continue in 2021. The next round of fiscal stimulus is coming our way one way or another, and it’s just a matter of size and timing. This also aligns with our recommendation to focus on the recovery stocks, even during this growth scare, as that is where the upside is greatest. A move higher in rates should only further support that view, as most recovery stocks are positively correlated to such a move, led by financials, consumer cyclicals, materials and industrials with a smaller capitalization skew.”