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.
If you are feeling some relief because of the “trade truce” between the US and China, don’t. At least that is what Morgan Stanley and Bank of America are saying. Morgan Stanley explains that the current rally is very reminiscent of what happened last November, just before the market imploded and had the worst December on record. At that time, the US and China had another truce which sent markets rallying. However, bigger tensions loomed larger and set the market up for a historic fall. One of the big issues was that the seeming ”truce” stopped inventory managers from purchasing because there was no more incentive to stockpile.
FINSUM: The most interesting view here is the idea that the markets are trapped between the “Powell Put” and the “Trump Call”. That is the concept that every time markets are doing well, Trump will try to drive a harder bargain with China, and if the market falls, Powell will cut rates. In this way, markets could be trapped in a banded range.
The big bull market of the last decade is now coming to an end, according to Morgan Stanley. The bank says that the US market cycle has moved into a “downturn” phase for the first time since 2007. The bank says the change in its cyclical indicator adds to “a litany of downside risks we see for the markets”. The bank says the change of phase typically means a bear market is coming. The call on markets came in a report delivered to MS clients on Sunday and follows May’s big 6%+ drop in stocks.
FINSUM: In our view, it is a particularly hard time to make a call on markets. Things do seem to be worsening in the data, but most of the negativity is colored by the trade war, which could conceivably end abruptly. That hint of positivity aside, it seems best to be positioned defensively.
You certainly won’t think of it this way, but Morgan Stanley is arguing that Apple is now a great healthcare play. The bank’s research team says Apple is on the verge of a major new product that will transform the healthcare space, meaning there could be a lot of value in the stock that is not being priced in. Katy Hubert of MS says “Apple is building a healthcare ecosystem and is poised to emerge as a leader in consumer-centric healthcare … Healthcare is a large, greenfield services opportunity for Apple”. She continued, saying “Unlike recent announcements on news, gaming, video, and payments, where Apple is joining existing competitors, healthcare is a market where Apple has the potential to lead digital disruption”. The stock is up strongly this year because investors are happy with its shift to a more services-oriented business model.
FINSUM: It is hard to speculate on the potential impact without know the product, but we must say Apple does seem to have a major opportunity if it can map a healthcare product onto the hundreds of millions of users of its products in the US alone.