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Mike Wilson: Not All Bank Reserves Are Created Equal
4 april 2023 · 4 min
Recent increases in the Fed’s balance sheet may not have the same impact on money supply, growth and equities as in previous cycles. Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, April 3rd at 11:30 a.m. in New York. So let's get after it.
Over the past month, market participants have been focused on how the government will deal with the stress in the banking system and whether the economy can withstand this latest shock. After a rough couple of weeks, especially for regional banks, the major indices appear to be shrugging off these risks. Many are interpreting the sharp increase in bank reserves as another form of quantitative easing and are exhibiting the Pavlovian response that such programs are always good for equity prices. As we discussed in prior podcasts, we do not think that's the right interpretation of this latest increase in the Fed's balance sheet.
In our view, all bank reserves are not created equal. True money supply as a function of reserves and the velocity of money which is difficult to measure in real time. As a comparison, inflation did not appear after the first wave of quantitative easing used during the great financial crisis because the velocity of money simultaneously collapsed. This was despite the fact that the percentage increase in the Fed's balance sheet dwarfed what we experienced during COVID. The primary difference was that the increase in reserves during the great financial crisis was simply filling holes left on bank balance sheets from the housing crisis. Therefore, the increase in reserves did not lead to a material increase in true money supply in the real economy. In contrast, during COVID, the increase in reserves are pushed directly into the economy via stimulus checks, …
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Andrew Sheets: Be Careful What You Wish For
31 maart 2023 · 3 min
Given recent signs of slowing in a previously strong economy, investors may want to look to history before wishing for weaker growth. Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Assets Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the Global Investment landscape and how we put those ideas together. It's Friday, March 31st at 2 p.m. in London.
Here at Morgan Stanley Research, we are cautious on global equities relative to high grade bonds. So what would change our mind? We think the bull case for markets is better than expected growth, even if that means higher interest rates. On the other hand, investors should be careful about wishing for weaker growth, even if that would mean easier policy.
Central to our thinking is the observation that a sharp slowing of a previously strong economy has repeatedly been poor for stocks relative to high grade bonds. And we think signs of such an environment of a hot economy that's slowing abound. Inverted yield curves, falling earnings expectations, high inflation, tight labor markets, weak commodity prices and tightening bank lending standards are all consistent with a strong economy that's slowing and are all present to an unusual degree. Historically, the-more of these factors one has seen, the worst the forward looking environment for stocks versus bonds.
In short, much of our caution is driven by concerns around the growth outlook and its deceleration. So if growth is better than we expect, we think that's a positive surprise.
But wouldn't better growth mean higher interest rates, which were bad for markets last year? Shouldn't investors be wishing for weaker growth that would bring back lower rates and policy easing?
First, we would view 2022 as something of an outlier, the first time in 150 years that both U.S. stocks and long-term bonds fell by more than 10%. Today, the starting point fo…
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Vishy Tirupattur: A Challenging Road for Commercial Real Estate
30 maart 2023 · 3 min
As regional banks contend with sector volatility, commercial real estate could face challenges in securing new loans and refinancing debt when it matures. Lees meer
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Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about some of the challenges facing the commercial real estate markets. It's Thursday, March 30th at 11 a.m. in New York.
Commercial real estate market, or CRE in short, is a hot topic, especially in the context of recent developments in the banking sector. As we have discussed on this podcast, even though banks were already tightening lending standards, given recent events their ability and willingness to make loans is diminished.
Besides making loans, banks enable credit formation as buyers of senior tranches of securitizations. A regulatory response to recent events will likely decrease the ability of regional banks to be buyers of such tranches, if risk rates and liquidity capital ratio requirements are revised to reflect duration in addition to credit risk.
It's against this backdrop that we think about the exposure of regional banks to CRE. Understanding the nature of CRE financing and getting some numbers is useful to put this issue in context.
First, commercial real estate mortgage financing is different from, say, residential real estate mortgage financing in that they are generally non-amortizing mortgages with terms usually 5 or 10 years. That means at term there is a balloon payment due which needs to be refinanced into another 5 or 10 year term loan.
Second, there is a heightened degree of imminence to the refinancing issue for CRE. $450 billion of CRE debt matures this year and needs to be refinanced. It doesn't really get easier in the next few years, with CRE debt maturing and needing to be refinanced of about $550 billion per year until 2027. In all, between 2023 and 2027, $2.5 tril…
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Lauren Schenk: Analyzing the Online Dating Market
29 maart 2023 · 3 min
Many investors are questioning if the online dating market has become saturated and, in turn, if there is still a growth runway for the industry. Lees meer
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Welcome to Thoughts on the Market. I'm Lauren Schenk, Equity Analyst covering Small and Mid-Cap Internet stocks. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the next leg of growth for the online dating industry. It's Wednesday, March 29th at noon in New York.
Investors are understandably focused on turmoil in banking, but today we'll be taking a break from banks to cover a hot topic in any macro environment, online dating.
Almost every investor call I get includes the question, "Is online dating just becoming saturated, mature or over-monetized?" Several data points have driven this market view. First, revenue growth at the top dating apps slowed in 2022 and provided more modest fiscal year 2023 guides and expected. Second, survey data suggests U.S. online dating adoption slowed over COVID. Third, app data implies U.S. monthly active users have been flat for five plus years, suggesting that monetization has driven all the growth and may slow from here.
This data prompted us to dig deeper into the multiple growth drivers of online dating revenue growth to see if investor concerns are well founded. And we found that online dating is not just about users and user growth. Today, roughly 32% of the U.S. addressable single population uses online dating and 26% of that 32% pay for online dating either through a subscription or a la carte purchase.
In fact, our analysis suggests there's still plenty of growth runway. There are effectively four key drivers of online dating growth between users and monetization, potential users, or total addressable market, online dating usage, payer penetration and revenue per payer. Most dating apps employ a "Freemium" model, meaning the service and platform are free to use, but the experience and success rate can be improved vi…
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Introducing: What Should I Do With My Money?
29 maart 2023 · 3 min
If you're a listener to Thoughts on the Market you may be interested in our new podcast: What Should I Do With My Money? Lees meer
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Managing our money can be ... a lot. It's one of the most important aspects of our lives, and yet, many of us just muddle through, without any help, hoping that we haven’t made a mistake.
It doesn’t have to be that way. At Morgan Stanley, we help people manage their money at all stages of their lives, whether a young person just starting out or an executive planning their retirement. And while each person's situation is unique, many of their concerns are common.
On this podcast, we match real people, asking real questions about their money, with experienced Financial Advisors. You’ll hear answers to important questions like: Is now the right time to buy a house? What to do if your business fails? How should I be saving to cover the cost of college? How much do I really need to retire and am I on track?
Having an experienced Financial Advisor on your side can go a long way. Someone who you can trust, who gets you, who has tackled these same issues before and who has the expertise to develop a plan that fits your goals.
Join us as our guests share their stories around life's major moments. And hear the difference a conversation can make. Hosted by Morgan Stanley Wealth Management’s Jamie Roô.
For more information visit morganstanley.com/mymoney.
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Graham Secker: A Moment of Calm for European Equities
28 maart 2023 · 3 min
Amid uncertainty in the global banking sector, are European equities a safe haven for investors to weather the storm? Lees meer
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Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the implications on European equities from the increased uncertainty surrounding the global banking sector. It's Tuesday, March 28th at 3 p.m. in London.
After the turbulence of mid-March, a degree of calm has descended over markets recently, which has lifted European equities back to within 3% of their prior high and pushed equity volatility down to more normal levels. In effect, we think investors are now in 'wait and see' mode as they try to assess the forthcoming consequences and investment implications of recent events within the global banking sector.
Our recent discussions with investors suggests a potential lack of willingness to get too bearish at this time, with some still hopeful the markets can navigate a path of modestly weaker growth, with lower inflation and less hawkish central banks. For us, we view this outcome as a possibility rather than a probability and reflective of the fact that investors have been positively surprised by the general resilience of economies and equity markets to date.
However, this viewpoint ignores the fact that something has changed in the overall macro environment. First, yield curves are starting to steepen from very inverted levels, a backdrop that has traditionally been negative for risk markets as it reflects lower interest rate expectations due to rising recession risk. And second, we now have clear evidence, we think, that tighter monetary policy is beginning to bite.
Over the coming weeks, we may see anecdotal stories emerge of problems around credit availability, followed thereafter by weaker economic data and ultimately lower earnings estimates. We also suspect that more fin…
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Mike Wilson: Is Banking Stress the Last Straw for the Bear Market?
27 maart 2023 · 4 min
After the events of the past few weeks, earnings estimates look increasingly unrealistic and the bear market may finally be ready to appropriately factor-in elevated earning risks. Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 27th at 11 a.m. in New York. So let's get after it.
Back in October, when we turned tactically bullish, we wrote that markets often need the engraved invitation from a higher power to tell them what's really going on. For bond markets, that higher power is the Fed, and for stocks it's company earnings guidance.
Our assumption at the time was that we were unlikely to get the negative messaging on earnings from companies necessary for the final bear market low. Instead, our view is that it would likely take another quarter for business conditions to deteriorate enough for companies to finally change their minds on the recovery that is still baked into consensus forecasts.
Fast forward to today and we are seeing yet another quarter where estimates are being lowered to the same degree we have witnessed over the past two. In other words, it doesn't appear that the earnings picture is bottoming as many investors were starting to think last month. In fact, these downward revisions are progressing right in line with our earnings model, that suggests bottoms up estimates remain 15 to 20% too high.
More specifically, consensus estimates still assume a strong recovery in profitability. This flies directly in the face of our negative operating leverage thesis that is playing out. Our contention that inflation increases operating leverage and operating leverage cuts both ways, is a concept that is still under appreciated. We think that helps to explain why we are so far below the consensus no…
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Global Economy: Central Bank Policy in a Time of Volatility
25 maart 2023 · 9 min
As markets contend with the recent volatility in the banking sector, global central banks face the challenge of continuing to combat inflation against this updated backdrop. Chief Cross-Asset Strategist Andrew Sheets and Global Chief Economist Seth Carpenter discuss. Lees meer
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley.
Seth Carpenter: And I'm Seth Carpenter, Global Chief Economist.
Andrew Sheets: And today on the podcast we'll be talking about Global Central Bank policy and what's next amidst significant market volatility. It's Friday, March 24th at 4 p.m. in London.
Seth Carpenter: And it's noon here in New York.
Andrew Sheets: So Seth I know that both of us have been running around over the last week speaking with clients, but it's really great to catch up with you because we're coming to the end of the first quarter and yet I feel like a year's worth of things have happened in global central banks and the economic narrative. Maybe just take a step back and help us understand how you're thinking about the global economy right now.
Seth Carpenter: You're absolutely right, Andrew. There is so much going on this year, so it's worth taking a step back. Coming into this year, we were looking for the economy to slow down. And I think it's just critical to remember why, central banks everywhere that are fighting inflation are raising interest rates intentionally to tighten financial conditions in order to slow their economies down and thereby bring down inflationary pressures. The trick, of course, is not slowing things down so much that they actively cause a recession. So the Fed having hiked interest rates already, we came into the year expecting a few more hikes, but then the data got stronger and Chair Powell opened the door to maybe going back to 50 basis point hikes. And now we've got this development in the banking sector. But it's not as if so far the central banks hav…
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Special Encore: U.S. Pharmaceuticals - The Future of Genetic Medicine
23 maart 2023 · 8 min
Original Release on February 6th, 2023: As new gene therapies are researched, developed and begin clinical trials, what hurdles must genetic medicine overcome before these therapies are commonly available? Head of U.S. Pharmaceuticals Terence Flynn and Head of U.S. Biotech Matthew Harrison discuss. Lees meer
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Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Head of U.S. Pharma for Morgan Stanley Research.
Matthew Harrison: And I'm Matthew Harrison, Head of U.S. Biotech.
Terence Flynn: And on this special episode of Thoughts on the Market, we'll be discussing the bold promise of genetic medicine. It's Monday, February 6th, at 10 a.m. in New York.
Terence Flynn: 2023 marks 20 years since the completion of the Human Genome Project. The unprecedented global scientific collaboration that generated the first sequence of the human genome. The pace of research in molecular biology and human genetics has not relented since 2003, and today we're at the start of a real revolution in the practice of medicine. Matthew what exactly is genetic medicine and what's the difference between gene therapy and gene editing?
Matthew Harrison: As I think about this, I think it's important to talk about context. And so as we've thought about medical developments and drug development over the last many decades, you started with pills. And then we moved into drugs from living cells. These are more complicated drugs. And now we're moving on to editing actual pieces of our genome to deliver potentially long lasting cures. And so this opens up a huge range of new treatments and new opportunities.
And so in general, as we think about it, they're basically two approaches to genetic medicine. The first is called gene therapy, and the second is called gene editing. The major difference here is that in gene therapy you just deliver a snippet of a gene or pre-programmed message to the body that then allows the body to make the protein that's missing, With gene ed…
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Global Thematics: Emerging Markets Face Rising Debt Levels
22 maart 2023 · 7 min
As investors focus on the risks of debt, can Emerging Markets combat pressure from wide fiscal deficits? Global Head of Fixed Income and Thematic Research Michael Zezas, Global Head of EM Sovereign Credit Strategy Simon Waever and Global Economics Analyst Diego Anzoategui discuss. Lees meer
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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.
Simon Waever: I'm Simon Waever, Morgan Stanley's Global Head of EM Sovereign Credit Strategy.
Diego Anzoategui: And I'm Diego Anzoategui from the Global Economics Team.
Michael Zezas: And on this special episode of Thoughts on the Market, we'll discuss how emerging markets are facing the pressures from rising debt levels and tougher external financing conditions. It's Wednesday, March 22nd at 10 a.m. in New York.
Michael Zezas: The bank backdrop that's been unfolding over the last couple of weeks has led investors in the U.S. and globally to focus on the risks of debt right now. Emerging markets, which have seen sovereign debt levels rise in part due to the COVID pandemic, is one place where debt concerns are intensifying. But our economists and strategists here at Morgan Stanley Research believe this concern is overdone and that there might be opportunities in EM. Diego, can you maybe start by giving us a sense of where debt levels are in emerging markets, post-COVID, especially amidst rising interest rates globally?
Diego Anzoategui: The overall EM debt to GDP ratio increased 11% from 2019, reaching levels above the 60% mark in 2022. Just a level, leveled by some economists, that's a warning sign because of its potential effects on the growth outlook. But without entering the debate on where this threshold is relevant or not, there is no doubt that the increase is meaningful and widespread because nearly every team has higher debt levels now. And broadly speaking, there are two factors explaining the rise in EM debt. The f…
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Vishy Tirupattur: The Coming Challenges for Bank Credit
21 maart 2023 · 3 min
Against the backdrop of volatility in the banking sector, tightening in consumer and commercial credit may have far-reaching impacts for economic growth. Lees meer
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Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Chief Fixed Income Strategist here at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of the current volatility in the banking sector on credit. It's Tuesday, March 21st at 11 a.m. in New York.
On the back of the developments over the last two weeks, our banking analysts see a meaningful increase in funding costs ahead, which should lead to tighter lending standards, lower loan growth and wider loan spreads. Our economists were already expecting a meaningful slowdown in growth and job gains over the coming months, and the prospect of incremental tightening of credit conditions raises the risk that a soft landing turns into a harder one.
According to the U.S. Small Business Administration, small businesses are those that employ fewer than 500 workers, and between 1995 and 2021, they accounted for nearly 63% of the net new job creation. Today, nearly 47% of all private sector employees work at small businesses. In the banking sector, small banks account for 38% of total loans in the U.S. and 30% of commercial and industrial loans. Businesses rely on C&I loans for short term funding of activities such as hiring, paying workers, purchasing supplies, equipment and building inventories.
We now expect this C&I lending to slow down the most based on our prior experience. We also expect that lending to commercial real estate sector to decline given the stresses that are building over there. On the other hand, we are looking for lending to consumer to grow, but more slowly than what we thought before.
Beyond their normal lending activity, banks enable credit formation in the economy by being buyers of senior tranches of securitized credit, providing senior leverage to secur…
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Mike Wilson: The Risk of a Credit Crunch
20 maart 2023 · 4 min
As markets look to recent bank failures, how are valuations for both stocks and bonds likely to change with this risk to growth? Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 20th at 11 a.m. in New York. So let's get after it.
Over the past few weeks, the markets have fixated on the rapid failure of two major banks that, up until very recently, have been viewed as safe depository institutions. The reason for their demise is crystal clear in hindsight, and not that surprising when you see the interest rate risk these banks were taking with their deposits, and the fact that the Fed has raised rates by five percentage points in the past year. The uninsured deposit backstop put in place by the Fed and FDIC will help to alleviate further major bank runs, but it won't stop the already tight lending standards across the banking industry from getting even tighter. It also won't prevent the cost of deposits from rising, thereby pressuring net interest margins. In short, the risk of a credit crunch has increased materially.
Bond markets have exhibited volatility around these developments as market participants realize the ramifications of tighter credit. The yield curve has steepened by 60 basis points in a matter of days, something seen only a few times in history and usually the bond market's way of saying recession risk is now more elevated. An inversion of the curve typically signals a recession within 12 months, but the real risk starts when it re-steepens from the trough. Meanwhile, the European Central Bank decided to raise rates by 50 basis points last week, despite Europe's own banking issues and sluggish economy. The German bund curve seemed to disagree with that decision and steepened by 50 basis points…
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Sustainability: Energy-Efficient Buildings in Europe
17 maart 2023 · 6 min
As Europe commits to net-zero carbon emissions by 2050, one hurdle will be the energy emissions caused by buildings’ operations. What investment opportunities might come from energy renovation? European Building and Construction Equity Analyst Ceder Ekblom and European Property Analyst Sebastian Isola discuss. Lees meer
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Cedar Ekblom: Welcome to Thoughts on the Market. I'm Cedar Ekblom, Equity Analyst covering European Building and Construction for Morgan Stanley research.
Sebastian Isola: And I'm Sebastian Isola from the European Property Team.
Cedar Ekblom: On this special episode of Thoughts on the Market, we'll discuss Europe's commitment to building energy efficiency.
Cedar Ekblom: Sebastian when I talk to investors and talk about energy emissions, most people immediately think of cars and transportation. But according to the International Energy Agency, in 2021 the operation of buildings accounted for 30% of global final energy consumption and 27% of total energy sector emissions. That's a huge number. A lot of people don't realize that. So it's clear that decarbonizing building stock is essential to achieving a net zero by 2050 scenario. Sebastian, we recently wrote about this and with this big goal in mind, can you give us an overview of where Europe is right now and what the biggest opportunities are that you see?
Sebastian Isola: I think to start, Europe's building stock is old and inefficient. More than 40% was built before 1970 when the first energy efficiency standards were introduced, and we're currently renovating just 1% of building stock a year. The European Commission thinks that this needs to at least double to meet its 2030 target for a 55% cut in emissions. If we successfully lift innovation spend, there is a big opportunity for makers of solar, heating and ventilation equipment, building automation, energy efficient lighting, and any product linked to the building envelope from insulation to roofing and windows.
Cedar Ekblom…
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Michael Zezas: A New Dynamic for U.S. Banking
16 maart 2023 · 2 min
Investors’ renewed concerns around the banking system should have a variety of impacts on fixed-income investment. Lees meer
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Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Thursday, March 16th at 11 a.m. in New York.
It's a volatile moment in markets, with investors grappling with complicated questions around the failure of Silicon Valley Bank. That event has naturally led to concerns about broader challenges to the banking system and potential impacts to the path for monetary policy. Here's what we think fixed income investors need to know in the near-term.
Our banking analysts and economists have concluded that the U.S. banking system is more constrained. The causes of the Silicon Valley Bank situation will likely cause banks and their regulators to think differently about capital, causing lending growth to decline more than expected this year. That, in turn, should put pressure on the labor market and therefore the general U.S. economic outlook.
We expect this dynamic will influence the U.S. bond market in the following ways in the near-term. For treasuries, we believe yields will be biased lower, because while the data still shows inflation pressures have persisted, that may take a backseat to financial stability concerns in the minds of investors. For corporate credit, there may be some near-term underperformance, given the market features a heavy weighting towards bonds issued by U.S. banks. In MUNI's, our team doesn't expect them to outperform in the near-term as the kind of interest rate volatility caused by recent events historically has been a headwind to the asset class. But a bright spot might be agency mortgage bonds, where our colleagues see room for compression in yields relative to treasuries. Those levels, which are…
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Cryptocurrency: The Issue of Regulation
15 maart 2023 · 9 min
As cryptocurrency has seen some of its major players topple, policy makers have set their sights on regulation. So what are some of the possible scenarios for crypto policy? U.S. Public Policy Researcher Ariana Salvatore and Head of Cryptocurrency Research Sheena Shah discuss. Lees meer
Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.
Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.
Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to othe…
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Martijn Rats: Differing Prospects for Oil & Gas
14 maart 2023 · 4 min
While oil and gas prices generally move in similar directions, their current situation has deviated from market norms. Lees meer
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Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodities Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll give you an update on the global oil and gas markets. It's Tuesday, March 14th at 2 p.m. in London.
Energy markets are currently confronted with an unusual situation: usually oil and gas prices move in similar directions, but at the moment they have quite different prospects.
Let's start with the global gas market, that is the gas market outside the United States, which has its own dynamic. Over the last 12 months, the center of activity in global gas has been Europe. This time last year, Europe still received close to 400 million cubic meters a day of natural gas from Russia. Over last summer, this fell by around 90% to just a trickle, causing a severe spike in European gas prices. At the time, we argued that gas prices needed to rise to drive demand destruction and attract LNG, that is liquefied natural gas that can be transported on tankers, to Europe. Prices indeed rose. By August, European gas prices reached over €300 per megawatt hour, that is more than 20x their normal level.
Since then, the European gas market has seen the most dramatic turn around. For starters, demand destruction has been far greater than expected. Warm weather has helped, but that has certainly not been the main driver. At the same time, LNG imports into Europe have risen to levels that seemed unlikely this time last year. Remarkably, European gas prices have been declining for some time already, but energy imports just keep coming. The European gas market now faces the surprising situation that if demand stays as weak as it currently is, and LNG imports continue at the level of the last few months, inventories could fill over the summer to such an extent that Europe c…
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Mike Wilson: What Bank Wind-Downs Mean for Equities
13 maart 2023 · 4 min
Banking news and other market pressures are leading some depositors to move funds from traditional banks to higher-yielding securities. How will this affect economic growth and equity prices? Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 13th at 11 a.m. in New York. So let's get after it.
The speed and size of the Silicon Valley bank wind down over the last week was startling to many investors, even those who have been negative on the stock for months on the basis of exactly what transpired- a classic mismatch between assets and liabilities and risk taking beyond what a typical depositor does. To be clear about our view, we do not think there's a systemic issue plaguing the entire banking system, like in 2007 to 2009, particularly with the FDIC decision to backstop uninsured deposits. However, last week's events are likely to have a negative impact on economic growth at a time when growth is already waning in many parts of the economy.
Rather than do a forensic autopsy of what happened at Silicon Valley and other banks, I will instead focus my comments and what it may mean for equity prices more broadly. First, I would remind listeners that Fed policy works with long and variable lags. Second, the pace of Fed tightening over the past year is unprecedented when one considers the Fed has also been engaged in aggressive quantitative tightening. Third, the focus on market based measures of financial conditions, like stock and bond prices, may have lulled both investors and the Fed itself into thinking policy tightening had not yet gone far enough. Meanwhile, more traditional measures like the yield curve have been flashing warnings for the past 6 months, closing last week near its lowest point of the cycle.
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U.S. Tech: The Future of Artificial Intelligence
10 maart 2023 · 12 min
As the advancement of generative AI takes off, how might this inflection point in technology impact markets, companies, and investors alike? Equity Analyst and Head of U.S. Internet Research Brian Nowak and Head of the U.S. Software Research Team Keith Weiss discuss. Lees meer
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Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Equity Analyst and Head of U.S. Internet Research for Morgan Stanley.
Keith Weiss: And I'm Keith Weiss, Head of the U.S. Software Research Team.
Brian Nowak: Today, we're at Morgan Stanley's annual Tech, Media, and Telecom conference in downtown San Francisco. We've been here most of the week talking with industry leaders and emerging companies across the spectrum, and the topic on everyone's mind is clearly A.I. So today, we're going to share some of what we're hearing and our views on the rise of artificial intelligence tools. It's Thursday, March 9th at 2 p.m. here on the West Coast.
Brian Nowak: All week, Keith and I have been meeting with companies and speaking with new companies that are developing technologies in artificial intelligence. We've written research about how we think that artificial intelligence is reaching somewhat of an iPhone inflection moment with new people using new tools, and businesses starting to realize artificial intelligence is here to stay and can drive real change. Keith, talk to us about how we reached this moment of inflection and how do you think about some of the big picture changes across technology?
Keith Weiss: Well, thank you for having me, Brian. So we've been talking about artificial intelligence for some time now. Software companies have been infusing their solutions with machine learning driven type algorithms that optimize outcomes for quite some time. But I do think the iPhone analogy is apt, for two reasons. One, what we're talking about today with generative AI is more foundational technologies. You can almost think about that as the operating system on the mobi…
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Andrew Sheets: A Test for U.S. Growth
9 maart 2023 · 3 min
While the U.S. has surprised investors with its economic resilience, new labor market and retail sales data could challenge this continued strength. Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Thursday, March 9th at 2 p.m. in London.
One of the biggest surprises this year has been the resilience of the U.S. economy. This story faces a key test over the next week, with a large bearing on how investors may think about where we are in the cycle.
Investors entered this year downbeat on U.S. growth, with widespread expectations of a recession. A payback in high levels of consumption over the pandemic, and the lagged impact of higher interest rates, were both big drivers of this view. And indeed many traditionally leading indicators of economic activity did, and still do, point to elevated economic risk.
Yet the story so far has been different. The U.S. economy is still seeing robust consumption and jobs growth and more economically sensitive stocks have been major outperformers. Last month the U.S. economy added half a million jobs and saw very robust retail sales, data points that were taken by the market as a sign that the economy may not be slowing at all.
That might be the case, but what's interesting is that this story is about to get a key update. Over the next week, we'll get the next release of data on the U.S. labor market and retail sales. And that data comes with a big uncertainty.
The uncertainty is how much of the strength in January's data was flattered by so-called seasonal adjustments. For obvious reasons, a lot of things are sold in December and a lot of people are hired to sell them. In January, activity and jobs usually drop off, and so seasonal adjustments are important to help look through…
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Chetan Ahya: Is Asia’s Growth Bouncing Back?
8 maart 2023 · 3 min
While there is some skepticism that Asia’s growth will outperform this year, there are a few promising indicators that investors may want to keep in mind. Lees meer
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Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing how Asia's growth is bouncing back. It's Wednesday, March 8th at 9 a.m. in Hong Kong.
The last time I came on this podcast, I spoke about why we expect Asia's growth to outperform in 2023. To briefly recap, we expect Asia's growth to be five percentage points higher than the developed markets by the end of the year. One of the key debates we have with investors is precisely about how the growth outlook is tracking relative to our bullish forecasts.
Investors are generally skeptical on two counts. First, for China, investors believe that consumption growth will not be sustained after the initial reopening boost. Second, for region excluding China, investors saw that there was a soft patch in the consumption data for some of the economies, and so they are questioning if this will persist over time and across geographies.
For China, we have already seen a sharp rebound in services spending in areas like dining out, domestic travel and hotels. We expect consumption growth to continue to recover towards the pre-COVID strength in a broad-based manner. Crucially, this consumption growth is being supported by the sustainable drivers of job growth and income growth rather than a drawdown in excess savings. Private sector confidence is being revived by the alignment of policies towards a pro-growth stance. This shift in stance also means that policymakers will likely be taking quick and concerted policy action to address any remaining or fresh impediments to growth. In other words, this policy stance is likely to persist at least until we get clear signs of a sustainable recovery. Moreover, the property sector, whic…
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Special Encore: Andrew Sheets - The Impact of High Short-Term Yields
7 maart 2023 · 3 min
Original Release on February 24th, 2023: As short-term bond yields continue to rise, what impact does this comparatively high yield have on the broader market? Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 24th at 2 p.m. in London.
One of the biggest stories brewing in the background of markets is the sharp rise in yields on safe, short-term bonds. A 6 month Treasury bill is a great example. In November of 2021, it yielded just 0.06%. Today, just 14 months later, it yields 5.1%, its highest yield since July of 2007.
The rise in safe short-term yields is notable for its speed and severity, as the last 12 months have seen the fastest rise of these yields in over 40 years. But it also has broader investment implications. Higher yields on cash like instruments impact markets in three distinct ways, all of which reduce the incentive for investors to take market exposure.
First and most simply, higher short term rates raise the bar for what a traditional investor needs to earn. If one can now get 5% yields holding short term government bonds over the next 12 months, how much more does the stock market, which is significantly more volatile, need to deliver in order to be relatively more appealing?
Second, higher yields impact the carry for so-called leveraged investors. There is a significant amount of market activity that's done by investors who buy securities with borrowed money, the rate of which is often driven by short term yields. When short term yields are low, as they've been for much of the last 12 years, this borrowing to buy strategy is attractive. But with U.S. yields now elevated, this type of buyer is less incentivized to hold either U.S. stocks or bonds.
Third, higher short term yie…
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Mike Wilson: A Strong Rebound for Markets
6 maart 2023 · 4 min
While equity markets continue to rally, the key to the end of the bear market may be in the fundamentals. Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 6th at 2 p.m. in New York. So let's get after it.
Given our focus on the technicals in the short term, I'm going to provide an update on that view today, which contrasts with our intermediate term view that the bear market is not over. In short, equity markets traded right to technical support levels on Thursday last week and held. More importantly, they reacted strongly from those levels, which suggests this will not be a one day wonder, meaning the bear market rally may not be over yet.
While my comments will focus on the S&P 500, these observations apply to most of the other major indices as well: the Nasdaq, Russell 2000 and the Dow Industrials, which remains the weakest of the bunch. First, as already mentioned, the key support levels were tested twice over the past few weeks, but on Thursday equity prices reacted strongly around the second test. As a strategist, I respect the price action and need to incorporate it into our fundamental view, which remains bearish.
In addition to the strong rebound, the S&P 500 was able to recapture its uptrend from the rally that began in October. However, we did not observe any positive divergence on the second retest, and that leaves the door open that this rally may still be on borrowed time. We would point out that one of the reasons we called the rally in October had to do with the fact that we did get a very strong positive divergence on that secondary low in mid-October. For listeners who don't use technical analysis, a positive divergence is when markets make new price lows on less momentum. We measure mome…
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U.S. Economy: The Next American Productivity Renaissance, Pt. 2
3 maart 2023 · 8 min
The way companies and individuals spend their money has changed in the wake of the COVID pandemic. How might market leadership shift as a result and will new market winners come into focus? Chief Cross-Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss. Lees meer
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.
Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.
Andrew Sheets: And on part two of this special episode, we'll be continuing our discussion of the "Next American Productivity Renaissance". It's Friday, March 3rd at 2 p.m. in London.
Lisa Shalett: And it's 9 a.m. in New York.
Andrew Sheets: So Lisa, let's take this to markets, how do you think this impacts equity market leadership, given that we've been in a market that's really been defined by the age of secular stagnation. What do you think happens now and who will be those new leaders?
Lisa Shalett: This is one of the most important, I think, outcomes of our thesis. And that is that pendulums swing and market leadership shifts all the time, but when it's at that moment of inflection there's huge amounts of pushback, typically. Our sense is that the wealth creation ahead of us may not be in the current leadership in consumer tech, but rather in enterprise tech and the technology providers who are the leaders in new automation technologies that are going to allow us potentially to automate parts of our economy that have heretofore resisted. So it's a lot of the services side of the economy. Think of financial services, consumer services, government services, education services, how manual some of those industries are. And yet when we think about these triads or four or five level combinations of things like artificial intelligence, and machine learning, and optical scanning, and natural language processing and v…
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U.S. Economy: The Next American Productivity Renaissance, Pt. 1
2 maart 2023 · 8 min
The COVID pandemic changed the way the U.S. engages with work, but how will these shifts impact structural changes to capital investment? Chief Cross-Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss. Lees meer
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research.
Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.
Andrew Sheets: And on this special two-part episode, we'll be discussing what we see as the "Next American Productivity Renaissance". It's Thursday, March 2nd at 2 p.m. in London.
Lisa Shalett: And it's 9 a.m. in New York.
Andrew Sheets: So while everybody has been paying close attention, and rightly so, to 40 year highs of inflation that we've been having recently, there's another legacy from this pandemic that we want to dig into more deeply. We believe that the COVID crisis catalyzed an incredibly powerful regime shift, a once-in-a-generation shock to the labor markets which transformed the nature of work and is accelerating structural changes to capital investment. Lisa, you believe we're on the cusp of what you call the "Next American Productivity Renaissance", and this renaissance is underpinned by an upcoming capital spending supercycle. So, I guess the place to start is what does that mean and what's driving it?
Lisa Shalett: I mean, I think that some of these trends were already beginning to take form before COVID struck, but COVID was really an accelerant. And so if we think about first the detachment from the labor force and the way COVID really transformed the way we think about work, and those jobs that maybe were not flexible to convert to a remote setting, or a work from home setting, and carried with them in-person high risk attributes. I think that was really one of the first dimensions of it, but then it was really about companies having to fundam…
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Michael Zezas: The Global Impact of the Inflation Reduction Act
1 maart 2023 · 2 min
After the passing of the Inflation Reduction Act in the U.S., other countries may be looking to invest more in their own energy transitions. Lees meer
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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, March 1st at 10 a.m. in New York.
When Congress passed and the president signed into law the Inflation Reduction Act last year, they may have started a race among global governments to spend new money in an attempt to cut carbon output dramatically. Consider the European Union, where our economists and strategists are flagging that they expect, later this month, there will be an announcement of a major allocation of government funds to mirror the nearly $370 billion allocated by the U.S. toward its own energy transition.
In the U.S., we've already flagged that much of the investment opportunity lies in the domestic clean tech space. As Stephen Byrd, our Global Head of Sustainability Research, has flagged the IRA's monetary allocation and rules creating preferences for materials sourced domestically or in friendly national confines, means that the U.S. clean tech space is seeing a substantial growth in demand for its products and services.
In the EU, the story is more nuanced as we await details on what a final version of the European Commission's Green Deal Industrial Plan is, a process that could take us into the summer or beyond. Streamlining regulations to encourage private funding and expand the network for trade partners on green tech equipment is expected to be in focus. So the near term macro impacts are murky, but at a sector level, such a policy should present opportunities in utilities, capital goods, materials and construction. In short, this policy would mean the EU is finding ways to accelerate demand…
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Sarah Wolfe: The Fed Versus Economic Resilience
28 februari 2023 · 3 min
As the U.S. economy remains resilient in the face of continued rate hikes, investors may wonder if the Fed will re-accelerate their policy tightening or if cuts are on their way. Lees meer
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Welcome to Thoughts on the Market. I'm Sarah Wolfe from the U.S. Economics Team. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the economic response to the Fed's monetary tightening. It's Tuesday, February 28th, at 1 p.m. in New York.
The Fed has been tightening monetary policy at the fastest rate in recent history. And yet the U.S. economy has been so remarkably resilient thus far that investors have begun to interpret this resilience as a sign that the economy has been less affected by monetary policy than initially expected. And so recession fears seem to have turned into fears of re acceleration.
Of course, interest sensitive parts of the economy have largely reacted as expected to the Fed hiking interest rates. Housing activity responded immediately to higher interest rates, declining significantly more than in prior cycles and what our models would imply. Consumer spending on durable goods has dampened as well, which is also expected.
And yet other factors have bolstered the economy, even in the face of higher rates. The labor market has shown more resilience since the start of the hiking cycle as companies caught up on significant staffing shortfalls. Households have spent out excess savings supporting spending, and consumers saw their spending power boosted by declining energy prices just as monetary tightening began.
As these pillars of resilience fade over the coming months, an economic slowdown should become more apparent. Staffing levels are closing in on levels more consistent with the level of economic output, pointing to a weaker backdrop for job growth for the remainder of 2023 and 2024. Excess savings now look roughly normal for large parts of the population, and energy prices are unlikely to be a…
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Mike Wilson: Is the Worst of this Earnings Cycle Still Ahead?
27 februari 2023 · 3 min
As we enter the final month of the first quarter, recalling the history of bear market trends could help predict whether earnings will fall again. Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, February 27th at 11am in New York. So let's get after it.
Our equity strategy framework incorporates several key components. Overall earnings tend to determine price action the most. For example, if a company beats the current forecast on earnings and shows accelerating growth, the stock tends to go up, assuming it isn't egregiously priced. This dynamic is what drives most bull markets, earnings estimates are steadily rising with no end in sight to that trend. During bear markets, however, that is not the case. Instead, earnings forecasts are typically falling. Needless to say, falling earnings forecasts are a rarity for such a high quality diversified index like the S&P 500, and that's why bear markets are much more infrequent than bull markets. However, once they start, it's very hard to argue the bear markets over until those earnings forecasts stop falling.
Stocks have bottomed both before, after and coincidentally with those troughs in earnings estimates. If this bear market turns out to have ended in October of last year, it will be the farthest in advance that stocks have discounted the trough in forward 12 month earnings. More importantly, this assumes earnings estimates have indeed troughed, which is unlikely in our view. In fact, our top down earnings models suggest that estimates aren't likely to trough until September, which would put the trough in stocks still in front of us. Finally, we would note that the Fed's reaction function is very different today given the inflationary backdrop. In fact, during every…
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Andrew Sheets: The Impact of High Short-Term Yields
24 februari 2023 · 3 min
As short-term bond yields continue to rise, what impact does this comparatively high yield have on the broader market? Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 24th at 2 p.m. in London.
One of the biggest stories brewing in the background of markets is the sharp rise in yields on safe, short-term bonds. A 6 month Treasury bill is a great example. In November of 2021, it yielded just 0.06%. Today, just 14 months later, it yields 5.1%, its highest yield since July of 2007.
The rise in safe short-term yields is notable for its speed and severity, as the last 12 months have seen the fastest rise of these yields in over 40 years. But it also has broader investment implications. Higher yields on cash like instruments impact markets in three distinct ways, all of which reduce the incentive for investors to take market exposure.
First and most simply, higher short term rates raise the bar for what a traditional investor needs to earn. If one can now get 5% yields holding short term government bonds over the next 12 months, how much more does the stock market, which is significantly more volatile, need to deliver in order to be relatively more appealing?
Second, higher yields impact the carry for so-called leveraged investors. There is a significant amount of market activity that's done by investors who buy securities with borrowed money, the rate of which is often driven by short term yields. When short term yields are low, as they've been for much of the last 12 years, this borrowing to buy strategy is attractive. But with U.S. yields now elevated, this type of buyer is less incentivized to hold either U.S. stocks or bonds.
Third, higher short term yields drive up the cost of buying assets in…
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Sustainability: Carbon Offsets and the Issue of Greenwashing
24 februari 2023 · 8 min
Companies continue their attempts to mitigate their environmental impact. But are some merely buying their way out of the problem using carbon offsets? Global Head of Sustainability Research Stephen Byrd and Head of ESG Fixed-Income Research Carolyn Campbell discuss. Lees meer
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Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research.
Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research.
Stephen Byrd: On this special episode of the podcast, we'll discuss the voluntary carbon offset market and the role carbon offsets play in achieving companies' decarbonization goals. It's Thursday, February 23rd at 10 a.m. in New York.
Stephen Byrd: As extreme weather becomes the new normal, and sustainability rises in importance on investors' agendas, many companies are working towards mitigating their environmental impact. But even so, there's persistent public concern that some companies claiming to be carbon neutral may in fact be "greenwashing" by purchasing so-called carbon offsets. So, Carolyn, let's start with the basics. What exactly are carbon offsets and why should investors care?
Carolyn Campbell: So a carbon offset represents one ton of carbon dioxide equivalent removed, reduced or avoided in the atmosphere. Companies are buying offsets to neutralize their own emissions. They essentially subtract the amount of carbon offsets purchased from their total emissions, from their operations and supply chain. These offsets are useful because it allows a company to take action against their emissions now, while implementing longer term decarbonization strategies. However, there's concern that these companies are just buying their way out of the problem and are using these offsets that do not actually do anything with respect to actually limiting global warming. So, Stephen, some of these offsets focus on reducing carbon dioxide emissions, while others ai…
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U.S. Housing: Is Activity About to Pick Up?
22 februari 2023 · 7 min
With housing affordability plateauing and inventory picking up, sales could be poised to rise again in the near future. Lees meer
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Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley.
Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securities Products Research.
Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing and mortgage markets. It's Wednesday, February 22nd, at 11 a.m. in New York.
Jay Bacow: All right. So, Jim, when we're looking at data on the housing market, it seems like it's all over the place. We've got home sale activity pointing one direction. We've got home prices doing other things. What's going on? You've had this bifurcation narrative. Is the bifurcation narrative still bifurcating?
Jim Egan: So to remind our listeners, the bifurcation narrative for our housing forecasts is between home prices, which we thought were a lot more protected, and housing activity, so sales and housing starts where we thought you were going to see a lot more weakness. And I would say that bifurcation narrative still exists. But, as you're saying, the different data have been pointing to different things. For instance, purchase applications, they picked up sequentially in January from December. And after declining in every single month of 2022, the homebuilder confidence has increased in both January and February.
Jay Bacow: All right. But when I think about what happened over that time period, mortgage rates fell almost 100 basis points from their highs in November, as you measure that purchase application pick up from December to January. Is that playing a role? Do you think that there are signs that maybe housing activity is going to pick back up?
Jim Egan: So from a mortgage rate perspective, it'd be difficult for us to say it isn't. So we do think that that's playing a role, but we also think it's a little too early to say that housi…
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Graham Secker: Are European Equities Still Providing Safety?
21 februari 2023 · 3 min
While the causes of the European equity rally have become more clear over time, so have the caveats that warrant caution over optimism for cyclical stocks. Lees meer
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Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the deflating safety cushion for European equities. It's Tuesday, February the 21st at 3 p.m. in London.
With the benefit of hindsight, it's relatively easy to justify the European equity rally since the start of October, given that we've seen an improvement in the macro news flow against a backdrop of low valuation and depressed investor sentiment and positioning. While the macro outlook could continue to improve from here, we think the safety cushion that low valuation and depressed sentiment had previously provided has deflated considerably as investors have been drawn back into the market by rising price momentum. On valuation, the MSCI Europe Index still looks quite inexpensive on a next 12 month forward PE of 13, however the same ratio for Europe's median stock has risen to 16, which is at the upper end of its historic range. Admittedly, a less padded safety cushion is not necessarily a problem if the fundamental economic and earnings trends continue to improve. However, there is now considerably less margin for any disappointment going forward.
This rebound in European equities has been led primarily by cyclical sectors who have outperformed their defensive peers by nearly 20% over the last six months. Historically, this pace of outperformance has tended to be a good sign, suggesting that we had started a new economic cycle with further upside for cyclical stocks ahead. However, while this sounds encouraging, we see three caveats that warrant caution rather than optimism at this point.
First, we have seen no deterioration in cyclicals’ profitability yet, and the lack of any downturn …
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Andrew Sheets: Falling Expectations for Global Equities
17 februari 2023 · 3 min
As our outlook for global equities becomes more cautious, what is influencing the move and what should investors watch as the story develops? Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 17th at 2 p.m. in London.
We recently moved to an underweight stance in global equities as part of our cross-asset allocations. I want to talk a bit about why we did this, why we did it recently and what we're watching.
The 'why' behind this move is straightforward, global equities now have low risk-adjusted returns in our framework. Our expected return for global stocks is now below what we see for bonds in the U.S., Europe or emerging markets, and it's also lower than what we expect for U.S. dollar cash. With lower expected returns and higher expected volatility, we think it makes sense to hold a lower than normal amount of global equities, hence our underweight stance.
In terms of why we've made this change recently, a few things have shifted. Per Morgan Stanley's forecast, we entered the year expecting low returns for U.S. equities, but higher returns for non-U.S. stocks. But as prices have gone up in 2023, our expected returns outside the U.S. have also fallen, while in the U.S. they're now negative.
We also think about expected returns based on longer-run valuations, and then adjusting these for economic conditions. We frame those economic expectations through something we call our cycle indicator, which is trying to look at economic data through the lens of being either stronger or weaker than average, and improving or softening. That indicator recently flipped, indicating a regime where the data is still strong but it's no longer improving, and historically that's often meant lower than average equi…
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Daniel Blake: The End of an Era for Japan
16 februari 2023 · 4 min
Next month the leadership of the Bank of Japan will change hands, so what policy shifts might be in store and what does this imply for markets? Lees meer
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Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss Japanese equity markets and the changing of the guard at the Bank of Japan. It's Thursday, February 16th at 8 a.m. in Singapore.
March the 10th will mark the end of an era for Japan, with Haruhiko Kuroda completing his final meeting at the helm of the Bank of Japan. Alongside the late Shinzo Abe, Kuroda-san has been instrumental in creating and implementing the famous Abenomics program over the last decade, and we think he's been successful in bringing Japan out of its long running deflationary stance. And just this week we've had the nomination of his replacement, Kazuo Ueda, a well-respected University of Tokyo professor and former Bank of Japan board member. He may not be a household name outside of the economics community, but his central bank and policy bloodlines run deep, having studied a Ph.D. at MIT alongside former Fed Chairman Ben Bernanke and under the tutelage of Stanley Fischer, former Bank of Israel governor and vice Fed chair.
So as we see a generational handover at the BoJ, what do we expect next and what does it imply for equity markets?
Firstly, Japan has made a lot of progress, but we don't think the mission has been fully accomplished on the Bank of Japan's 2% inflation target. Current inflation is being driven by cost pressures and while wage growth is picking up, we don't think wages will move up to the levels needed to see inflation at 2% being sustained. So we don't expect the BoJ under Ueda-san to embark on a tightening cycle the way we have seen for the Fed and the ECB. However, we can look for some change and in particular we think Ueda-san will look to resolve some…
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Michael Zezas: Understanding the Impact of Elections
15 februari 2023 · 3 min
As potential candidates begin to announce their presidential campaigns, is it time to start considering how the 2024 race will drive markets? Lees meer
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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 15th at 10 a.m. in New York.
With the news that Nikki Haley, former South Carolina governor and ambassador to the United Nations, is now running for the Republican nomination for president, investors are starting to ask questions about how the 2024 race for the White House will drive markets. Well, in our view, it's not worth spending too much time on, at least not yet through the lens of an investor, particularly when compared to the very relevant debate about the path of monetary policy and inflation. Let me explain.
When it comes to understanding the impact of elections on markets, it's all about the policy paths opened up by different outcomes. Markets would care deeply, for example, if information we had today, say about who's running for president, could reliably tell us something about whether there will be in 2025 changes in tax policy, existing and emerging trade barriers with China or policy toward Ukraine. But at this point, projecting such changes is nearly pure speculation.
Consider that, this far ahead of the election, knowing who the declared candidates are doesn't give us a lot of new information about who will become president. Polls, while never a perfect predictor, have little predictive value this far ahead of an election. Look at Barack Obama and Donald Trump who, when they declared their candidacies, didn't have strong poll numbers but obviously found political success.
Also, remember that knowing who will become president is only one piece of the puzzle in forecasting policy outco…
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U.S. Consumer: What’s Coming for Spending in 2023?
14 februari 2023 · 8 min
Though U.S. consumer spending was surprisingly robust in 2022, this poses both new and continuing challenges as households draw down their excess savings. Lees meer
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Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team.
Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team.
Michelle Weaver: On this special episode of the podcast, we'll discuss how the U.S. consumer is faring. It's Tuesday, February 14th at 10 a.m. in New York.
Michelle Weaver: The health of the consumer is critical for the equity market, and consumer spending last year helped companies continue to grow their earnings. Sarah, can you give us a snapshot of the overall health of the U.S. consumer right now? Do people still have plenty of savings, and what are you expecting around consumer savings for the rest of the year?
Sarah Wolfe: The U.S. consumer was extraordinarily strong in 2022, despite negative real disposable income growth. For perspective, spending was about 3% growth year over year in 2022, and real disposable income was negative 6.5%. Part of that was inflation eroding all income gains, but it was also a tough year as we lapped fiscal stimulus from 2021. So what got consumers through negative 6.5% real income growth? It was this excess savings story. Consumers tapped their excess savings pretty significantly, and we estimate that the drawdown was roughly 30% from its peak. However, when we look into 2023, we don't think consumers are going to be tapping into their savings reserves quite as much.
Michelle Weaver: It sounds like households draw down quite a bit of their excess saving. Is there any danger that they're going to run out? And if that's the case, when do you think that will play out?
Sarah Wolfe: So we don't think 100% of excess savings are going to get spent ever. Remember, savings is not cash in your wallet, it's just anything that hasn't been spent. So some of these savings have …
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Seth Carpenter: Can Inflation Continue To Come Down?
13 februari 2023 · 5 min
Inflation was a key topic in a recent meeting at the Brookings Institution. While it has trended downward recently, the details are critical to tracking the path ahead. Lees meer
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Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about inflation and the U.S. economy. It's Monday, February 13th at 10 a.m. in New York.
This past week, I was fortunate to be part of a panel discussion at the Brookings Institution, a research think tank in Washington, D.C. I was one of three economists in discussion with one of the White House's main economic advisers. Unsurprisingly, the topic of inflation came up.
One key chart from the White House economist juxtaposed services wage inflation with core services inflation, excluding housing. The key point of the chart was that falling wage inflation in the services sector may put some downward pressure on inflation in core services, excluding housing. This topic is timely because Chair Powell has repeatedly referenced services inflation, excluding housing, as a key risk to their goal for achieving price stability.
A couple of weeks ago I'd written on the same topic, and there we tried to show that even the link itself between wage inflation and services inflation is a bit tenuous. But just looking at the raw data, it is clear that the monthly run rate on other services remains elevated. But a question we have to ask ourselves is, 'is it elevated a lot or a little?'
Since June of last year, core services inflation, excluding housing, has trended down, and for December, it was at about 32 basis points on a month-over-month basis. That December pace is 3.9% in annual terms and would contribute about 2.1 percentage points to core PCE inflation. To put those numbers into context, recall that from 2013 to 2019, before COVID, core services inflation, excluding housing, averaged about 18 basis poin…
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Andrew Sheets: The Complexities of Market Risk
10 februari 2023 · 3 min
While the risk of economic contraction has lessened in a few regions, is the story of recession and market risk being oversimplified? Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 10th at 2 p.m. in London.
Markets have been fixated on the question of whether the U.S. and Europe will enter recession this year. With Europe benefiting from a fall in energy prices and the U.S. adding half a million jobs in January, it's tempting to think that recession risk is now lower and by extension, the risk to markets has passed. But the story may be more complicated.
Near term, the risk of an economic contraction or recession has fallen. Europe has seen the largest swings here, where much lower energy prices, a result of a mild winter and plentiful supply from the United States, is leading to both less inflation and better growth, the proverbial 2-for-1 deal.
Recession risk has also fallen a bit in the U.S., where our economists tracking estimate for U.S. GDP has been moving modestly higher.
For markets, however, we fear that this story is getting oversimplified, to a recession is bad and no recession is good. At one level yes, avoiding a recession is definitely preferable. But markets often care most about the rate of change. It remains likely that U.S. growth will decelerate meaningfully this year, even in a scenario where a recession is avoided.
For one, the idea that the U.S. avoids recession but still sees a meaningful slowdown in growth is the current forecast from Morgan Stanley's economists. And that's also the signal that we're getting from our market indicators. We classify an environment where leading economic data is strong but starting to soften as 'downturn'. That phase tends to see below a…
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Vishy Tirupattur: A Change in Fed Policy Expectations
9 februari 2023 · 4 min
With the latest U.S. employment report showing unexpected resilience in the labor market, what happens now for the Fed and the policy tightening cycle? Lees meer
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Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Head of Fixed Income Research and Director of Quantitative Research. Along with my colleagues, bringing you a variety of perspectives, today I will discuss the market implications from the latest U.S. employment report. It's Thursday, February 9th at noon in New York.
When it comes to economic data releases, there are surprises and there are shockers. Last Friday's U.S. employment report was clearly in the latter category. Ahead of the release, the market consensus estimate was for 185,000 new jobs based on Bloomberg's survey of 77 economists. And yet the Bureau of Labor Statistics reported 517,000 new jobs added during the month, which is about eight and half standard deviations from the average expectation of the Bloomberg survey participants. By any measure, that's huge.
The report showed strength across the board. Of course, there were some temporary drivers, like technical adjustments to seasonality factors, mild weather in January, and a resolution of certain strikes that contributed to this large scale boost to the January employment data. These things are unlikely to persist. Still, the U.S. labor market remains far more resilient than previously expected, with really no clear signs of stopping on the Monday following the January data release, Fed Chair Powell struck a more hawkish tone as he emphasized there is a significant road ahead before policymakers would be assured that inflation is returning to the 2% target.
So what happens now? Even if the January employment report is not indicative of a change of trajectory in the U.S. labor market, it will likely take a few more months for the true underlying trends to emerge. Respecting the strength of the current labor market conditions, our U.S. economists be…
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Michael Zezas: The State of U.S. Policy
8 februari 2023 · 3 min
Following last night’s State of the Union Address by President Biden, what are some signals from the speech that investors should consider? Lees meer
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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 8th at 10 a.m. in New York.
Last night, President Biden delivered the annual State of the Union address to a joint session of Congress. Traditionally, this speech lays out the policy proposals of the administration. In the past, this hasn't signaled much, with only about 24% of proposals historically ending up enacted that year. As a recent 538.com study highlighted. But amidst the noise, there's some potential signal for investors to consider. Here's what we're watching.
First, it's clear that U.S. policy will still drive the key investment themes of slowing globalization and the shift to a multipolar world. Biden's speech had much to say about the impact of recently enacted legislation like CHIPS+ and the Inflation Reduction Act, both of which included incentives to shift supply chains on key technologies back to the U.S. or friendly countries. One area this supports is the clean tech industry, which should see substantial demand for its U.S. produced products.
Second, it's clear that investors need to keep paying attention to the debate on tech regulation. Biden referenced bipartisan antitrust legislation aimed at tech companies. While, as we previously discussed, there's a lot of details to be worked out before this type of legislation has a fighting chance of being enacted, the momentum behind it seems to be building. So it will be important to assess the impact of different types of regulation to large cap tech companies.
Finally, and perhaps most important in the near term, the speech underscores s…
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Latin America Economy: The Possibility of Opportunity in 2023
7 februari 2023 · 9 min
As the outlook for 2023 shows emerging markets looking better positioned than developed markets, how is Latin America faring in this more optimistic story? Chief Latin American Equity Strategist Gui Paiva and Chief Latin American Economist Andre Loes discuss. Lees meer
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Gui Paiva: Welcome to Thoughts on the Market. I'm Gui Paiva, Morgan Stanley's Chief Latin American Equity Strategist.
Andre Loes: And I'm Andre Loes, Morgan Stanley's Chief LatAm Economist.
Gui Paiva: And on this special episode of the podcast, we will discuss this year's economic and equity outlook for Latin America. It is Tuesday, February 7th, at 10 a.m. in New York.
Andre Loes:] And noon in Sao Paulo.
Gui Paiva: By all accounts, last year was a difficult one for global markets. Yet so far, 2023 is starting on a brighter note. There are reasons to be more optimistic with moderating inflation and the outlook for China and Europe solidifying the case for a weaker U.S. dollar. Overall, emerging markets look better positioned than developed markets, and within EM today we'll take a look specifically at Latin America. Andre, to set the stage can you give us a sense of how Latin America has fared post-COVID, and how it has dealt with the big global challenges of 2022?
Andre Loes: Well Gui, the growth performance of the region was not particularly different from the other regions during the bulk of the COVID slump. But the levels of poverty in LatAm were already high at the beginning of the pandemic and the increase in unemployment in 2020 and 2021 aggravated that situation. The erosion of purchasing power stemming from accelerating inflation played an important role as well, and the result was mounting strain for political proposals backing more unorthodox ideas, especially a permanent rise in fiscal spending. So the policy reaction aiming to control inflation has been deployed amid these more challenging contexts.
Gui Paiva: Well, you just mentioned policy reaction. Indeed, with ra…
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U.S. Pharmaceuticals: The Future of Genetic Medicine
6 februari 2023 · 8 min
As new gene therapies are researched, developed and begin clinical trials, what hurdles must genetic medicine overcome before these therapies are commonly available? Head of U.S. Pharmaceuticals Terence Flynn and Head of U.S. Biotech Matthew Harrison discuss. Lees meer
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Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Head of U.S. Pharma for Morgan Stanley Research.
Matthew Harrison: And I'm Matthew Harrison, Head of U.S. Biotech.
Terence Flynn: And on this special episode of Thoughts on the Market, we'll be discussing the bold promise of genetic medicine. It's Monday, February 6th, at 10 a.m. in New York.
Terence Flynn: 2023 marks 20 years since the completion of the Human Genome Project. The unprecedented global scientific collaboration that generated the first sequence of the human genome. The pace of research in molecular biology and human genetics has not relented since 2003, and today we're at the start of a real revolution in the practice of medicine. Matthew what exactly is genetic medicine and what's the difference between gene therapy and gene editing?
Matthew Harrison: As I think about this, I think it's important to talk about context. And so as we've thought about medical developments and drug development over the last many decades, you started with pills. And then we moved into drugs from living cells. These are more complicated drugs. And now we're moving on to editing actual pieces of our genome to deliver potentially long lasting cures. And so this opens up a huge range of new treatments and new opportunities.
And so in general, as we think about it, they're basically two approaches to genetic medicine. The first is called gene therapy, and the second is called gene editing. The major difference here is that in gene therapy you just deliver a snippet of a gene or pre-programmed message to the body that then allows the body to make the protein that's missing, With gene editing, instead what you do is you go in …
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Andrew Sheets: Where Could Market Strength Persist?
3 februari 2023 · 3 min
After a year of falling assets, 2023 has started strong for global markets. Chief Cross-Asset Strategist Andrew Sheets outlines which markets could sustain their momentum. Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 3rd at 2 p.m. in London.
2022 was a year where almost all assets fell. 2023 so far has been the opposite. Stocks in China, Japan, Europe and the U.S. are all off to unusually good starts. Meanwhile, U.S. long term bonds have actually risen more than the stock market.
But behind this widespread strength are some rather different stories. I want to talk through these and how they inform our view of where this strength could continue, or not.
One set of strength is coming out of Asia, where China's reopening from COVID has been much more aggressive than expected. This is a material change of policy in the world's second largest economy, which has persisted despite a large initial rise in case numbers. That persistence has made our analysts more confident that large amounts of consumer spending could still be unlocked. While valuations in emerging markets and China equities have risen as a result of this reopening, we think they remain reasonable, and therefore our overweight equities in China, Korea and Taiwan.
The second story is Europe. China's rebound is part of the narrative here, but we think a larger driver is energy. A mild winter and abundant supplies of U.S. LNG have caused the price of natural gas in Europe to fall by more than 60% since early December, and by more than 80% since late August. This decline has specific benefits reducing inflation while simultaneously easing pressures on economic growth, a proverbial win-win. But falling energy prices also have a more gene…
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Jonathan Garner: Tracking Asia and EM Outperformance
2 februari 2023 · 3 min
Emerging markets are turning bullish and China’s reopening leaves room for an increase in consumption. What sectors and industries might benefit from this upturn? Lees meer
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Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and emerging market equity strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, in this episode I'll explain why the bull market in emerging market equities is still young. It's Thursday, 2nd of February at 8 a.m. in Singapore.
In our view, the bull market in emerging market equities is still young. We entered a bull market, conventionally defined as up 20% from the trough, in the second week of January, having completed the bear market in mid-October. And bull markets typically last at least a year in our asset class, although the pace of recent market gains will probably slow.
Unlike the U.S. market, earnings estimates revisions in Asia and emerging markets are now inflecting upwards, and that's why emerging equities are performing U.S. equities more rapidly even than in early 2009. And we think this outperformance is likely to continue a while longer. As we've entered a bull market the 52 week rolling beta, or measure of correlation of emerging markets versus U.S. equities, has undergone a regime shift falling from around 0.8 times in the third quarter last year to just 0.4 times currently. And even more striking, the beta of the Hang Seng index, at the leading edge of the current bull market in our asset class, compared to the S&P 500 has fallen close to zero. This is lower than at any point in the last 30 years of data and speaks to an environment of extreme decoupling and performance.
These factors have led us to raise our growth stock exposure in recent months. Particularly in North Asia ex-Japan, so that's China, Korea and Taiwan, we expect those markets to continue to outperform, as is typical in the early phases of a bull market, whilst we expect Southeast Asi…
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Michael Zezas: U.S. Policy and Investment Restrictions on China
1 februari 2023 · 2 min
As reports that the White House may be considering more impactful approaches to Chinese investment restrictions reach investors, how much should they be reading into these policy deliberations? Lees meer
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Welcome to Thoughts on the Market. Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 1st at 10 a.m. in New York.
The influence of U.S. policy deliberations on financial markets was once again on display this week. Fresh reports that the White House continues to consider implementing rules that would restrict some investments in China, shouldn't surprise regular listeners of this podcast. After all, the U.S. government has been quite public about its intention to keep U.S. resources from supporting the development of key technologies in China deemed critical to U.S. economic and national security. But what might be a bit surprising was a report suggesting that one approach to achieving this goal could be quite different than many anticipated. In particular, the White House is reportedly considering blanket bans on investing in certain sectors of concern, rather than a tailored investment by investment review. Following the news, China equity markets have moved lower and many of our clients see a link.
However, we think investors shouldn't read too much into one media report. We emphasize that the media reports on this topic are full of hedged and subjective language. While it could very well be true that the administration is considering this more severe approach, policy deliberations of all kinds typically consider multiple options. So, the consideration of this approach doesn't inherently mean it's the most likely outcome.
But we do think one reliable read through from this report is that the U.S. is likely to enact some form of investm…
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Matt Hornbach: A Narrative of Declining Inflation
31 januari 2023 · 3 min
As the data continues to show a weakness in inflation, is it enough to convince investors that the Fed may turn dovish on monetary policy? And how are these expectations impacting Treasury yields? Lees meer
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Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today I'll talk about expectations for the Fed's monetary policy this year, and its impact on Treasury yields. It's Tuesday, January 31st at 10 a.m. in New York.
So far, 2023 seems to be 2022 in reverse. High inflation, which defined most of last year, seems to have given way to a narrative of rapidly declining inflation. Wages, the Consumer Price index, data from the Institute of Supply Management, or ISM, and small business surveys all suggest softening. And Treasury markets have reacted with a meaningful decline in yield.
We've now had three consecutive inflation reports, I think of them as three strikes, that did not highlight any major inflation concerns, with two of the reports being outright negative surprises. The Fed hasn't quite acknowledged the weakness in inflation, but will the third strike be enough to convince investors that inflation is slowing, so much so that the Fed may change its view on terminal rates and the path of rates thereafter?
We think it is. With inflation likely on course to miss the Fed's December projections, the Fed may decide to make dovish changes to those projections at the March FOMC meeting. And in fact, the market is already pricing a deeper than expected rate cutting cycle, which aligns with the idea of lower than projected inflation.
In anticipation of the March meeting, markets are pricing in nearly another 25 basis point rate hike, while our economists see a Fed that remains on hold. The driver of our economists view is that non-farm payroll gains will decelerate further, and core services ex housing inflation will soften as well, p…
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Mike Wilson: Fighting the Fear of Missing Out
30 januari 2023 · 4 min
Stocks have seen a much better start to 2023 than anticipated. But can this upswing continue, or is this merely the last bear market rally before the market reaches its final lows? Lees meer
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Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 30th and 11 a.m. in New York. So let's get after it.
2023 is off to a much better start than most expected when we entered the year. Part of this was due to the fact that the consensus had adopted our more bearish view that we pivoted back to in early December. Fast forward three weeks, however, and that view has changed almost 180 degrees, with most investors now adopting the new, more positive narrative of the China reopening, falling inflation and U.S. dollar and the possibility of a Fed pause right around the corner. While we acknowledge these developments are real net positives, we remind listeners that these were essentially the exact same reasons we cited back in October when we turned tactically bullish. However, at that point, the S&P 500 was trading 500 points lower with valuations that were almost 20% lower than today. In other words, this new narrative that seems to be gaining wider attention has already been priced in our view. In fact, we exited our tactical trade at these same price levels in early December. What's happening now is just another bear market trap in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out. This FOMO has only been exacerbated by our observation that most missed the rally from October to begin with, and with the New Year beginning they can't afford to not be on the train if it's truly left the station.
Another reason stocks are rallying to start the year is due …
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Andrew Sheets: The Choice Between Equities and Cash
27 januari 2023 · 2 min
Investing is all about choices, so what should investors know when choosing between holding a financial asset or cash? Lees meer
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 27th at 2 p.m. in London.
Investing is about choices. In any market at any moment, an investor always has the option to hold a financial asset, like stocks or bonds, or hold cash. For much of the last decade, cash yielded next to nothing, or less than nothing if you were in the Eurozone. But cash rates have now risen substantially. 12-month Treasury bills now yield about 2.5% more than the S&P 500.
When an asset yields less than what investors earn in cash, we say it has negative carry. For the S&P 500 that carry is now the worst since August of 2007. But this isn't only an equity story. A U.S. 30 year Treasury bond yields about 3.7%, much less than that 12 month Treasury bill at about 4.5%.
Buying either U.S. stocks or bonds at current levels is asking investors to accept a historically low yield relative to short term cash. Just how low? For a 60/40 portfolio of the S&P 500 and 30 year Treasury bonds the yield, relative to those T-bills, is the lowest since January of 2001.
To state the obvious low yields relative to what you can earn in cash isn't great for the story for either stocks or bonds. But we think bonds at least get an additional price boost if growth and inflation slow in line with our forecasts. It also suggests one may need to be more careful about picking one's spots within Treasury maturities. For example, we think 7 year treasuries look more appealing than the 30 year version.
For stocks, we think carry is one of several factors that will support the outperformance of international over U.S. equities. Many non-…
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Graham Secker: An Upturn for European Equities
26 januari 2023 · 4 min
European equities have been outperforming U.S. stocks. What’s driving the rally, and will it continue? Lees meer
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Welcome to Thoughts on the Market. I'm Graham Sacker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the recent outperformance of European equities and whether this could be the start of a longer upturn. It's Thursday, January the 26th at 4 p.m. in London.
After a tricky period through last summer, the fourth quarter of 2022 saw European equities enjoy their best period of outperformance over U.S. stocks in over 30 years. Such was the size of this rally that MSCI Europe ended last year as the best performing region globally in dollar terms for the first time since 2000. In addition, the relative performance of Europe versus U.S. stocks has recently broken above its hundred week moving average for the first time since the global financial crisis. We do not think this latter event necessarily signals the start of a multi-year period of European outperformance going forward, however we do think it marks the end of Europe's structural underperformance that started in 2008.
When we analyze the drivers behind Europe's recent rally, we can identify four main catalysts. Firstly, the economic news flow is holding up better in Europe than the U.S., with traditional leading indicators such as the purchasing managers surveys stabilizing in Europe over the last few months, but they continue to deteriorate in the U.S. Secondly, European gas prices continue to fall. After hitting nearly $300 last August, the price of gas is now down into the $60's and our commodity strategist Martin Rats, forecasts it falling further to around $20 later this year. Thirdly, Europe is more geared to China than the U.S., both economically and also in terms of corporate profits. For example, we calculate that European companies generate around 8% of their sales from China, vers…
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U.S. Economy: Renegotiating the Debt Ceiling
25 januari 2023 · 9 min
Last week, the U.S. Treasury hit the debt ceiling. How will markets respond as Congress decides how to move forward? Chief Cross-Asset Strategist Andrew Sheets and Head of Global Thematic and Public Policy Research Michael Zezas discuss. Lees meer
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross-Asset Strategist.
Michael Zezas: And I'm Michael Zezas, Head of Global Thematic and Public Policy Research.
Andrew Sheets: And on this special episode of the podcast, we'll be discussing the U.S. debt ceiling. It's Wednesday, January 25th at 2 p.m. in London.
Michael Zezas: And 9 a.m. in New York.
Andrew Sheets: Mike, it's great to be here with you. I'm sure many listeners are familiar with the U.S. debt ceiling, but it's still probably worthwhile to spend 30 seconds on what it is and what hitting the debt ceiling really means.
Michael Zezas: Well, in short, it means the government hit its legal limit, as set by Congress, to issue Treasury bonds. And when that happens, it can't access the cash it needs to make the payments it's mandated to make by Congress through appropriations. Hitting this limit isn't about the U.S. being unable to market its bonds, it's about Congress telling Treasury it can't do that until Congress authorizes it to have more bonds outstanding. Now, we hit the debt ceiling last week, but Treasury can buy time using cash management measures to avoid running out of money. And so what investors need to pay attention to is what's called the X date. So that's when there's actually not enough cash left on hand or coming in to pay all the obligations of the government. At that point, Treasury may need to prioritize some payments over others. That X date, it's a moving target and right now the estimates are that it will occur sometime this summer.
Andrew Sheets: So I often see the debt ceiling and government shutdowns both used as reference points by investors, but the debt ceiling and govern…
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U.S. Retail: A Tale of Two Halves
24 januari 2023 · 10 min
As economic pressures continue to drive consumption in the U.S., how will the health of the economy influence the soft lines industry? Head of Retail and Consumer Credit for Fixed Income Research Jenna Giannelli and U.S. Soft Lines Retail Equity Analyst Alex Straton discuss Lees meer
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Jenna Giannelli: Welcome to Thoughts on the Market. I'm Jenna Giannelli, Head of Retail and Consumer Credit within Morgan Stanley's Fixed Income Research.
Alex Straton: And I'm Alex Straton, Morgan Stanley's U.S. Soft Lines Retail Equity Analyst.
Jenna Giannelli: And on this special episode of Thoughts on the Market we'll discuss soft lines from two different but complementary perspectives, equity and corporate credit. It's Tuesday, January 24th at 10 a.m. in New York.
Jenna Giannelli: Our economists here at Morgan Stanley believe that tighter monetary policy and a slowing labor market will be the key drivers of consumption in the U.S. this year. Against this still uncertain backdrop where we're cautious on the health of the U.S. consumer, we're at an interesting moment to think about the soft lines industry. So let's start with the equity side. Alex, you recently said that you see 2023 as a 'tale of two halves' when it comes to soft lines. What do you mean by that and when do you see the inflection point?
Alex Straton: So, Jenna, that's right, we are describing 2023 as a 'tale of two halves'. That's certainly one of the taglines we're using, the other being 'things are going to go down before they go up'. So let's start with a 'tale of two halves'. I say that because in the first half what retailers are facing are harder compares from a PNL perspective, an ongoing excess inventory overhang and likely recessionary conditions from a macro perspective. On top of that, what we've got is 2023 street EPS estimates sitting about 15% too high across our coverage. As we know, earnings revisions are the number one driver of stock prices in our space. So if we have negative re…