Don’t Defy the Fed: Morgan Stanley Strategists Warn Investors on Equity Rally
By Investors have been flocking to the equity rally, but Morgan Stanley strategists are warning them not to defy the Federal Reserve. The US central bank began rapidly raising interest rates last year in an effort to bring down the surge in US inflation seen during the pandemic.[0]
Monday saw a rise in the 10-year Treasury note yield to 3.632%, and two-year yields to 4.454%, following a surprisingly strong jobs report, as reported by Dow Jones Market Data.[1] When bond yields go up, prices go down, and when bond yields go down, prices[0]
As of Monday, the iShares MSCI ACWI ex U.S. ETF which offers exposure to stocks in both developed and emerging markets excluding the U.S., had risen 7.1% in 2023, according to FactSet data.[0] In comparison, the SPDR S&P 500 ETF Trust grew by 7.2% during the same time frame.[0]
The strategists said that while last week's events did not lead to an immediate reversal in the bear market rally, they did not offer any conclusive evidence to suggest a new bull market began in October.[2] They added that it is important to note that typically when forward earnings growth goes negative, the Fed is actually cutting rates, which is not the case this time around, creating an additional headwind for equities.[3]
Fifty-two percent of investors say they are bearish this quarter, down slightly from last quarter, and 89% expect volatility to continue or increase during this period, according to Morgan Stanley Wealth Management's latest quarterly investor pulse survey.[4] Despite the fact that 55% of participants believe that inflation is on the decline, 64% still view it as the primary risk to their investment portfolio.[4] 49% of people surveyed said that the potential of a recession was the biggest risk, and 44% were concerned about market volatility.[4]
[5] Fifty-one percent of investors said the Federal Reserve will be able to steer the economy into a soft landing, and 64% expect the US economy to be in better shape than it currently is by year-end.[5]
Investors should remain committed to their plans and consider diversifying their portfolios, as staying the course may be beneficial in the long run.[6] Watching the dollar and rates as key variables to determine how long equity markets can hold up, and pricing fundamentals carefully as the Fed is not cutting rates this time around, will be important for investors in the coming months.[2]
0. “‘Edge of a swamp': JPMorgan strategist sees ‘one time only sale' in fixed income as U.S. economy slows” msnNOW, 7 Feb. 2023, https://www.msn.com/en-us/money/markets/edge-of-a-swamp-jpmorgan-strategist-sees-one-time-only-sale-in-fixed-income-as-us-economy-slows/ar-AA17cMm3
1. “‘Edge of a swamp’: JPMorgan strategist sees ‘one time only sale’ in fixed income as U.S. economy slows” MarketWatch, 7 Feb. 2023, https://www.marketwatch.com/story/edge-of-a-swamp-jpmorgan-strategist-sees-one-time-only-sale-in-fixed-income-as-u-s-economy-slows-11675774251
2. “Michael Wilson: Earnings recession to get much worse” MacroBusiness, 7 Feb. 2023, https://www.macrobusiness.com.au/2023/02/michael-wilson-earnings-recession-to-get-much-worse/
3. “‘Don't Fight the Fed' is still alive and this week will serve as a reminder – MS By Investing.com” Investing.com, 30 Jan. 2023, https://www.investing.com/news/stock-market-news/dont-fight-the-fed-is-still-alive-and-this-week-will-serve-as-a-reminder–ms-432SI-2990958
4. “Morgan Stanley Wealth Management Pulse Survey Reveals Investors Remain Optimistic for 2023 Despite Dim Ne” Benzinga, 31 Jan. 2023, https://www.benzinga.com/pressreleases/23/01/b30644688/morgan-stanley-wealth-management-pulse-survey-reveals-investors-remain-optimistic-for-2023-despite
5. “Investors Still Bearish, but With Glimmer of Hope: Morgan Stanley” ThinkAdvisor, 31 Jan. 2023, https://www.thinkadvisor.com/2023/01/31/investors-still-bearish-but-with-glimmer-of-hope-morgan-stanley/
6. “Morgan Stanley Wealth Management Pulse Survey Reveals Investors Remain Optimistic for 2023 Despite Dim Near …” Business Wire, 31 Jan. 2023, https://www.businesswire.com/news/home/20230131005643/en/Morgan-Stanley-Wealth-Management-Pulse-Survey-Reveals-Investors-Remain-Optimistic-for-2023-Despite-Dim-Near-Term-Views
