Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why
investors might want to reassess their portfolios, keeping in
mind the gap between market moves and monetary policy.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief U.S. Equity Strategist. Today on the
podcast, why the Fed may hold the key for both near term and
medium-term stock market performance.
It's Monday, November 24th at 1pm in New York.
So, let’s get after it.
At the end of September, we discussed the building tension
between the Fed and markets in terms of both the fed funds rate
and liquidity, suggesting this had the potential to lead to a
correction in the short-term. This scenario is playing out with
high momentum and low-quality stocks responding more to
tightening liquidity back in September, while the high-quality
S&P 500 and Nasdaq 100 responded more to the incremental
hawkishness on rate cuts relayed at the October 29th Fed meeting.
While downside for the S&P 500 has been limited to just 5
percent, the damage under the surface has been more significant
with two-thirds of the largest 1000 stocks seeing more than a 10
percent drawdown and one quarter down more than 20 percent.
Similarly, Bitcoin is down close to 30 percent and topped even
earlier than high momentum stocks. Gold also felt the impact of
tighter liquidity earlier than the S&P 500, as one would
expect.
We’re staying vigilant around this dynamic related to monetary
policy and can't rule out more index-level downside in the
short-term, especially if breadth remains weak. Having said that,
we think the weakness under the hood is a sign that we're closer
to the end of this correction than the beginning for the weaker
areas of the market. Historically, the Generals tend to fall the
most at the end of corrections. As I said on this podcast back in
September, we would view this type of correction and reset on
expectations as an opportunity to double down on our rolling
recovery thesis which remains out of consensus.
From our perspective, private labor data are showing signs of
weakness that suggest the Fed should be cutting rates more
aggressively. This is very much in line with my core view that
the rate of change trough in the labor data occurred back in
April with the lows in the equity market. The official government
labor data that the Fed is waiting for is lagging and will simply
confirm what we, and the markets, already know. With the official
October jobs data cancelled due to the shutdown and the November
series not available until December 16th, the equity market may
continue to wrestle with the Fed that dragging its feet and
delaying rate cuts.
The good news is that we expect a meaningful decline in the
Treasury’s General Account in the coming weeks as the government
re-opens. This should help to provide a much-needed boost to
liquidity at the same time the Fed ends quantitative tightening.
The question is whether these changes will be enough to improve
liquidity conditions in a durable way. In my view, the clearest
indication will be if we see relief in areas of the equity market
and asset classes most sensitive to these dynamics over the next
two weeks. That means low quality profitless growth stocks in the
equity world should rally the most.
Bottom line, I remain convinced in our bullish 12-month outlook
for the S&P 500 and stocks more broadly. Initial feedback
from investors to our recently published 2026 outlook indicates
that several of our core views for 2026 remain out of consensus.
More specifically, our early cycle narrative versus consensus
thinking that we’re late cycle; 17 percent earnings growth next
year versus the consensus at 14 percent. And finally, our
upgrades of small/mid cap stocks and consumer discretionary goods
to overweight. Use near term weakness related to a Fed that is
moving too slow for the markets’ liking to reposition portfolio
to sectors and stocks that have lagged behind for most of the
past several years – but will benefit the most from the more
aggressive Fed action that we expect to come.
Thanks for tuning in; I hope you found it informative and useful.
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