Wall Street bulls exhausted? Morgan Stanley says time now to trim positions, plan trades for 2021

While the world is battling a pandemic, investors will look back at 2020 as an extraordinary year. However, with equity markets now at all-time highs, it might be time for investors to trim holdings. Morgan Stanley’s Chief Investment Officer and Chief US Equity Strategist Mike Wilson said in his latest podcast that he would advise against committing new capital, even though he retains a positive outlook for 2021. “I would advise against committing new capital at this point and would even consider trimming your biggest winners where the moves have become unsustainably strong,” he said.

Bulls tired but FOMO keeping markets going

NASDAQ index has zoomed 80% since the end of March, Dow Jones has gained 62% while S&P 500 is up 64% in the same time frame. Stock markets are at all-time highs, small caps have outperformed large caps by 20% since April and economically sensitive stocks have outperformed defensives. “In short, we just don’t see that many great opportunities left as the market looks as exhausted as people currently feel,” Mike Wilson said. He adds that When markets get this extended and overbought, they inevitably correct and consolidate.

Although the market strategist admits that the fear of missing out is high at this juncture which could delay a correction as nobody would want to sell prematurely, he still advises against going in with fresh capital.

What’s in store ahead?

Looking ahead, 2021 still commands a bullish outlook. Morgan Stanely says their key themes from this year should continue to work in the year. “Beyond small caps and economically sensitive stocks, we think reasonably priced growth stocks will have a decent year, too,” Mike Wilson added. For growth stocks he sees more opportunity coming from the healthcare sector than technology because valuations are more tolerable to the rise in interest rates that they expect.

The United States will once again be entering the election phase in January, this time for Georgia Senate seats. This, according to Morgan Stanley’s CIO holds prominence as a win for the Democrats will help them get control of the Senate. “This would raise the prospects for more onerous healthcare legislation that could hold the sector back,” he added. While healthcare stocks are already cheap, such an election result could provide another blow to them, which would make them “absolute buys”, according to Mike Wilson.