It is not going to be a huge crash, but Morgan Stanley thinks US stocks will struggle in 2020. The bank thinks the US is clearly “late-cycle” and that its growth will wane from 2.3% to 1.8% next year. It believes the Dollar will weaken and stocks will struggle. The bank thinks most of the benefits of the Fed’s rate cuts have already been priced into the market. “In 2020, the economy will grow more slowly as the bulk of the positive lift from lower interest rates will have been absorbed and households balance higher income with higher prices from tariff”, says Morgan Stanley. The bank says emerging markets are likely to outperform.
FINSUM: Of all the forecasts we have seen lately, this one seems the most realistic. We don’t see a big bust coming, but a plateau seems very believable.
Wall Street research teams have been pretty split in their market outlooks recently. While the general mood is always bullish in equity research, an inordinate number of banks have been pessimistic lately. Do not count Morgan Stanley in that group, as they have just come out with what cannot be considered anything other than a bullish note given the current environment. The bank says there is only an 11.4% chance of a recession in the next year. Morgan Stanley also pointed out that each asset class has its own positioning right now, saying “Rates are generally pricing in a higher risk of recession than equities, giving equities greater relative downside should a recession emerge and bonds greater relative downside should economic growth begin to trough/reaccelerate”.
FINSUM: As Morgan Stanley also added in this piece, the real time to worry is if companies start cutting jobs to maintain margins. Once that happens, consumer spending and sentiment will fall rapidly.
For some reason, there is a great deal of glee about the return of value stocks this month. Even though we are only on the 17th day of September, seemingly ever research department on Wall Street is ready to proclaim that value stocks are back. BAML fits the bill perfectly, saying that value stocks are like a tightly wound spring that is finally uncoiling. In their defense, value stocks have outperformed growth stocks by 9 percentage points this month, the biggest divergence since 2010. Morgan Stanley also notes that there is currently “a massive rotation away from growth-style factors toward value-style”.
FINSUM: It has been a great start to the autumn for value stocks, but they have been in a funk so long that it is hard to believe they have suddenly shed their shackles.
The bearish stream of warnings from Morgan Stanley continues unabated. The bank’s wealth management CIO has just made another big call for the firm, saying a correction is likely. Lisa Shallett of MS Wealth management says that the Fed is trying to fight the end of the cycle, and it will likely prove too hard to do. She believes that a recession and correction are highly likely in the next year and that stocks will drop by at least 10%. That said, she advises investors to buy further intro underperforming sectors.
FINSUM: Morgan Stanley says explicitly that they think the bond market’s call on the economy is more correct than stocks and that an economic hard landing is likely coming.
Investors need to take note, as one of the biggest equity research divisions on Wall Street has just turned overwhelmingly negative on equities. And this is not the “stocks will struggle in coming years” kind of call, it is an argument for right now and published yesterday. The bank has lowered its allocation to stocks, saying that the outlook for markets over the next three months is very poor. Morgan Stanley says equities prices are way too high and expectations for major rate cuts are already priced in, leaving little room for appreciation. They also think valuations are too high given deteriorating manufacturing and economic data.
FINSUM: Morgan Stanley is basically saying that the market is primed for disappointment because all the positive outcomes have already been priced in. Not unrealistic.