As the U.S. economy continues to send mixed signals, our CIO and
Chief US Equity Strategist explains how markets are likely to
oscillate between “soft landing” and “no landing” outcomes.
----- 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 higher-than-normal uncertainty in economic data
and its impact on markets.
It's Tuesday, May 7th at 1:30 pm in New York.
So let’s get after it.
In recent research, I’ve discussed how markets are likely to
oscillate between the "soft landing" and “no landing"
outcomes in today's late cycle environment. Continued mixed and
unpredictable macro data should foster that back and forth, and
last week was a microcosm in that respect.
Tuesday's Employment Cost Index report came in stronger than
expected, leading to a rise in the 10-year Treasury yield to
nearly 4.7 per cent. Meanwhile, the Conference Board Consumer
Confidence Index turned down, falling to its lowest level
since July of 2022.
On Friday, the equity market rose sharply as bond yields fell on
the back of a weaker labor report, while the ISM Services
headline series fell to its lowest level
since December of 2022.
In our view, this uncertain economic backdrop warrants an
investment approach that can work as market pricing and
sector/factor leadership bounces between these potential
outcomes. As such, we recommend a barbell of quality cyclicals
which should outperform in a "no landing" scenario and
quality growth, the relative winner in a "soft landing.” One
might even want to consider adding a bit of exposure to
defensive sectors like Utilities and Staples in the event that
growth slows further.
Meanwhile, last week's Fed meeting materialized largely as
expected. Chair Powell expressed somewhat lower
confidence on the timing of the first cut given recent inflation
data, but he pushed back on the notion that the next
move would be a hike which eased some concerns going into
the meeting. The April Consumer Price Index released
on May 15th is the next key macro event informing the path of
monetary policy and the market's pricing of that path. As usual,
the price reaction on the back of this release may be more
important than the data itself given how influential price action
has been on investor sentiment amid an uncertain macro set
up.
On the rate front, our view remains consistent with our recent
research—the relationship between the 6-month rate of change on
the 10-year yield and the S&P 500 price earnings
multiple implies that yields around current levels are about 10
per cent headwind to valuation through the end of June but a
tailwind thereafter, all else equal.
Given the uncertainty and unpredictability of the economic data
more recently, we think it's useful to look at the
technicals for insight into what comes next. In early April, we
highlighted that the breakdown in the S&P 500 from
its well-defined uptrend was an important early warning sign that
performance could become more challenged.
Based on our analysis, this headwind to valuation is likely to
remain with us through the end of June unless yields fall
significantly in the near term. Assuming interest rates stay
around current levels, stronger valuation support lies closer to
19 times earnings, which would also imply price support closer to
the 200-day moving average or 4800.
Thanks for listening. If you enjoy Thoughts on the Market, please
leave us a review wherever you listen and share the podcast with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.