Although Monday’s correction springs from multiple causes, the
real questions may be what’s next and when will the correction
become a buying opportunity?
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief US Equity Strategist. Along with my
colleagues bringing you a variety of perspectives, today I'll be
talking about the recent equity market correction and whether
it’s time to step in.
It's Monday, Aug 5th at 11:30am in New York.
So let’s get after it.
Over the past several weeks, global equity markets have taken on
a completely different tone with most major averages definitively
breaking strong uptrends from last fall. Many are blaming the
Fed’s decision last week to hold interest rates steady in the
face of weaker jobs data while others have highlighted the
technical unwind of the Japanese yen carry trade.
However, if we take a step back, this topping process began in
April with the first meaningful sell off since last October’s
lows. Even as many stocks and indices rallied back to new highs
this summer, the leadership took on a more defensive posture with
sectors like Utilities, Staples and even Real Estate doing better
than they have in years. As I have been discussing on this
podcast this shift in leadership has coincided with softer
economic data during the second quarter. This softness has
continued into the summer with the all-important labor market
data joining in as already noted.
This rotation was an early warning sign that stocks were likely
vulnerable to a correction as we highlighted in early July. After
all, the third quarter is when such corrections tend to happen
seasonally for several reasons. This year has turned out to be no
different. The real question now is what’s next and when will
this correction become a buying opportunity?
Lost in the blame game is the simple fact that valuations reached
very rich levels this year, something we have consistently
discussed in our research. In fact, this is the main reason we
have no upside to our US major averages over the next year even
assuming our economists’ soft landing base case outcome for the
economy. In other words, stocks were priced for perfection.
Now, with the deterioration in the growth data, and a Fed that is
in no rush to cut rates proactively, markets have started to get
nervous. Furthermore, the Fed tends to follow 2-year yields and
over the last month 2-year treasury yields have fallen by 100
basis points and is almost 170 basis points below the Fed Funds
rate. What this means is that the market is telling the Fed they
are way too tight and they need to cut much more aggressively
than what they have guided.
The dilemma for the Fed is that the next meeting is six weeks
away and that’s a lifetime when markets are trading like they are
today. Markets tend to be impatient and so I expect they will
continue to trade with high volatility until the Fed
appeases the market’s wishes. The flip side, of course, is that
the Fed does an intra meeting rate cut; but that may make the
markets even more nervous about growth in my view.
Bottom line, markets are likely to remain vulnerable in the near
term until we get better growth data or more comfort from Fed on
policy support, neither of which we think is forthcoming soon.
Finally, support can also come from cheap valuations, but we
don’t have that yet at current prices. As of this recording the
S&P 500 is still trading 20x forward 12-month earnings
estimates. Our fair value multiple assuming a soft-landing
outcome on the economy is closer to 19x, which means things
aren’t actually cheap until we reach 17-18x, which is more than
10 per cent away from where we are trading.
In the meantime, we continue to recommend more defensive stocks
in sectors like Utilities, Healthcare, Consumer Staples and some
Real Estate. Conversely, we continue to dislike smaller cap
cyclical stocks that are most vulnerable to the current growth
slowdown and tight rate policy.
Thanks for listening. If you enjoy the podcast, please leave us a
review wherever you listen, and share Thoughts on the Market with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.