Morgan Stanley’s Sheets Goes All-In on V-Shaped Recovery Trades

(Bloomberg) -- A famous Wall Street bear-turned-bull is urging clients to double down on V-shaped economic bets, even as talks on fresh stimulus collapse.

Spurred by conviction on reflation, Andrew Sheets is bullish on small-cap stocks and recommends selling defensive trades from technology firms to long-dated Treasuries.

With investors already hedged for election-related volatility, Morgan Stanley's chief of cross-asset strategy says the market rally has legs and more policy stimulus is coming soon enough.

“The glass half-full view of stimulus talks is if you don't get it today you'll get it tomorrow from whomever wins the election,” Sheets said in an interview. “This V-shaped recovery is still intact.”

His conviction that growth will continue unabated is in contrast with other strategists who say the U.S. is facing a multitude of risks. Lawmakers have been deadlocked for weeks on the details of a stimulus package and President Donald Trump surprised allies with a unilateral call on Tuesday to halt talks on a deal.

Sheets's recommendations are mirrored in hedge funds positioned ever more aggressively for a steeper U.S. yield curve, often seen as a bet on reflation. The latest data shows speculative net short positions in long bond futures have hit a record, while net long positions on 10-year Treasuries have climbed to their highest since October 2017.

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Sheets also said U.S. political risks are largely already reflected in prices after September's market swoon. He pointed to the recent outperformance of cyclical and value stocks as evidence of growing optimism.

The S&P 500 Value Index is at a two-week high, while the Nasdaq 100 Index has been stuck in a trading range.

“That shows that the market expects more stimulus,” he said.

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