Although markets have recovered over the last few weeks after a
sudden drop, our Head of Corporate Credit Research warns that
investors are still skeptical about the growth outlook.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Along with my
colleagues bringing you a variety of perspectives, today we’ll
discuss the big round trip for markets and why we’re not out of
the woods.
It's Friday, August 23rd at 2pm in London.
The last few weeks have been a rollercoaster. July ended on a
high with markets rallying as the Federal Reserve kept interest
rates unchanged. Things turned almost immediately thereafter as
weak data releases fanned fears that maybe the Fed was being just
a little too nonchalant on the economy, making its patience
withholding rates high look like a vice, rather than a virtue. A
late summer period where many investors were out probably
amplified the moves that followed. And so at the morning lows on
August 5th, the S&P 500 had fallen more than 8 percent in
just 3 trading days, and expected volatility had jumped to one of
its highest readings in a decade.
But since those volatile lows, markets have come back. Really
come back. Stock prices, credit spreads, and those levels of
expected volatility are all now more or less where they
ended July. It was an almost complete round-trip. We have a
colleague who got back from a two-week vacation on Monday. The
prices on their screen had barely changed.
The reason for that snapback was the data. Just as weak data in
the aftermath of the Fed’s meeting drove fears of a policy
mistake, better data in the days since have improved confidence.
This has been especially true for data related to the US
consumer, as both retail sales and the number of new jobless
claims have been better than expected.
This round-trip in markets has been welcome, especially for
those, like ourselves, who are optimistic on credit, and see it
well-positioned for the economic soft-landing that Morgan Stanley
expects.
But it is also a reminder that we’re not out of the woods. The
last few weeks couldn’t be clearer about the importance of growth
for the market outlook. This is a crucial moment for the economy,
where U.S. growth is slowing, the Fed’s rates are still highly
restrictive, and any help from cutting those rates may not be
felt for several quarters.
At Morgan Stanley we think that growth won’t slow too much, and
so this will ultimately be fine for the credit market. But
incoming data will remain important, and recent events show that
the market’s confidence can be quickly shaken. Even with the
sharp snapback, for example, cyclical stocks, which tend to be
more economically sensitive, have badly lagged more defensive
shares – a sign that healthy skepticism around growth from
investors still remains.
The quick recovery is welcome, but we’re not out of the woods,
and investors should continue to hope for solid data. Good is
good.
Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
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