2026 Midterm Elections: What’s at Stake for Markets

Following last night’s State of the Union Address by President Biden, what are some signals from the speech that investors should consider?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 8th at 10 a.m. in New York. Last night, President Biden delivered the annual State of the Union address to a joint session of Congress. Traditionally, this speech lays out the policy proposals of the administration. In the past, this hasn't signaled much, with only about 24% of proposals historically ending up enacted that year. As a recent 538.com study highlighted. But amidst the noise, there's some potential signal for investors to consider. Here's what we're watching. First, it's clear that U.S. policy will still drive the key investment themes of slowing globalization and the shift to a multipolar world. Biden's speech had much to say about the impact of recently enacted legislation like CHIPS+ and the Inflation Reduction Act, both of which included incentives to shift supply chains on key technologies back to the U.S. or friendly countries. One area this supports is the clean tech industry, which should see substantial demand for its U.S. produced products. Second, it's clear that investors need to keep paying attention to the debate on tech regulation. Biden referenced bipartisan antitrust legislation aimed at tech companies. While, as we previously discussed, there's a lot of details to be worked out before this type of legislation has a fighting chance of being enacted, the momentum behind it seems to be building. So it will be important to assess the impact of different types of regulation to large cap tech companies. Finally, and perhaps most important in the near term, the speech underscores something we've been flagging: the negotiation on how to raise the debt ceiling will be tricky and not solved in a timely manner. While calling for the debt ceiling to be raised without condition, Biden also seemed to concede there's room for negotiation on reducing the deficit. But in our view, that didn't signal a resolution was closer because the president also heavily referenced his desire for changes to the tax code to be part of that solution, something that's historically been a nonstarter for Republicans. In short, it appears in this negotiation so far, compromise has taken a backseat to rhetorical positioning by both sides. So as we stated here in the past, investors may want to prepare for an extended negotiation with a potentially late resolution, where knock-on effects to what is likely to be an already slowing economy are a distinct possibility. This is another reason our U.S. equity strategists continue to flag caution despite some solid recent performance in stocks. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

8 Helmi 20232min

As the outlook for 2023 shows emerging markets looking better positioned than developed markets, how is Latin America faring in this more optimistic story? Chief Latin American Equity Strategist Gui Paiva and Chief Latin American Economist Andre Loes discuss.----- Transcript -----Gui Paiva: Welcome to Thoughts on the Market. I'm Gui Paiva, Morgan Stanley's Chief Latin American Equity Strategist. Andre Loes: And I'm Andre Loes, Morgan Stanley's Chief LatAm Economist. Gui Paiva: And on this special episode of the podcast, we will discuss this year's economic and equity outlook for Latin America. It is Tuesday, February 7th, at 10 a.m. in New York. Andre Loes:] And noon in Sao Paulo. Gui Paiva: By all accounts, last year was a difficult one for global markets. Yet so far, 2023 is starting on a brighter note. There are reasons to be more optimistic with moderating inflation and the outlook for China and Europe solidifying the case for a weaker U.S. dollar. Overall, emerging markets look better positioned than developed markets, and within EM today we'll take a look specifically at Latin America. Andre, to set the stage can you give us a sense of how Latin America has fared post-COVID, and how it has dealt with the big global challenges of 2022? Andre Loes: Well Gui, the growth performance of the region was not particularly different from the other regions during the bulk of the COVID slump. But the levels of poverty in LatAm were already high at the beginning of the pandemic and the increase in unemployment in 2020 and 2021 aggravated that situation. The erosion of purchasing power stemming from accelerating inflation played an important role as well, and the result was mounting strain for political proposals backing more unorthodox ideas, especially a permanent rise in fiscal spending. So the policy reaction aiming to control inflation has been deployed amid these more challenging contexts. Gui Paiva: Well, you just mentioned policy reaction. Indeed, with rampant inflation in the region, Latin American central banks were probably ahead of the global curve in 2022, having started hiking interest rates in 21. Andre, how effective has their monetary policy been so far and what are your expectations for the rate cycle from here? Andre Loes: Well, the response of LatAm central banks came quite early and has been proving effective in most countries. One of the reasons central bankers of the region react promptly is related to the inflation prone past of the region, which is still fresh in the mind of many economic agents, which leads to de-anchoring of inflation expectations as soon as observed inflation accelerates. This means central banks need to react timely, and as a result, the central banks of Brazil, Mexico, Chile and Peru started to hike rates still in the first half of 2021, with Colombia following early on the second half. With the exception of Colombia, inflation has peaked in all countries under our coverage where the central banks pursue an inflation target. With lower inflation we see an easy cycle is starting in all countries in the region, with Chile leading in the second quarter, Peru and Mexico in the third quarter, and Brazil and Colombia cutting towards year end. Gui Paiva: And what are your economic growth forecasts for the rest of this year and the longer term? Andre Loes: Growth in 2023 will show a deceleration compared to last year with both Brazil and Mexico slowing down from 3% in 2022 to 1.4% in the current year. Deceleration will be more intense in Argentina, Chile, and Colombia, with Chile effectively go into a strong recession, a contraction of around 2%, in order to regain both price and theoretical stability. Lower growth is mostly due to the lagged effects of the material monetary policy tightening we have just discussed. But lower global growth will also play a part on that, especially for Mexico, given the strong economic integration of this country with the U.S. For South America, China's recovery may prove a boon, as the Asian country is the main export destination for Brazil, Argentina, as well as the metro exporters Chile, Peru. But Gui, let me turn it over to you on the equities side. What are some of the key investment themes you are following this year? Gui Paiva: We forecast 20% dollar upside for Latin American equities in 2023. The reasons behind our optimism are the region's leverage to the global economic cycle and the price you currently pay for regional stocks. So let me expand on these topics. First about the leverage to the global economic cycle. Historically, LatAm equities tend to perform well during the early and mid stages of the global economic cycle. The region produces several important soft and hard commodities like grains, copper, steel and iron ore, as well as energy products like crude oil and natural gas. Therefore, a rising commodity prices produces a positive terms of trade shock, which leads to stronger domestic economic growth and benefits, both directly and indirectly the public traded companies across the region. Let me pivot now to the second topic, which is the price of currently pay for regional stocks. In my 20 years as an equity strategist, I have learned that the return in an investment is highly correlated to the price you pay for the assets. Therefore, current depressed valuations of Latin equities provide an interesting entry point for investors looking to gain exposure to the EM trade at a discount. Moreover, historically, Latin American equities have posted strong returns during the 12 months following an EM bear market trough boosted by both global and local cyclical sectors. Andre Loes: Can you also walk us through some of the largest economies in the region and give us some color as to what's happening in the different LatAm markets? Maybe start with Mexico and in particular the nearshoring opportunities there. Gui Paiva: Sure Andre. In Mexico we struggle to have a positive structural view of our local equities over the past four years, because of the government's state centric approach to some of the key sectors in the economy, like energy and electricity. However, we are more optimistic now, and we believe economic growth could surprise to the upside from 2024 to 2030, and benefit the local stock market. First, if our U.S. house view is correct and the current bear market in U.S. equities finally ends in the first half of the year, Mexico should benefit in the second as a leveraged play on a potential 2024 U.S. economic recovery. Second, we have presidential elections in Mexico in mid 24, and we believe a newly elected government would likely take a less state centric approach to the key energy and electricity sectors, which would ultimately help boost private sector business confidence and thus investments. Last but not least, we see Mexico as potentially enjoying gains from the ongoing on and nearshoring manufacturing trends. If we are correct, then economic growth in Mexico shows surprise to the upside over the next six years and the current on and nearshoring investment theme in the country, which is limited to a handful of mid and small cap stocks, would broaden out, include some of the Mexican large caps. Andre Loes: And what about Brazil Gui? Gui Paiva: In Brazil, we have a neutral stance towards local equities because the current government has given signs that he intends to run a looser fiscal stance over the next few years, which should lead to a higher for longer monetary policy rate, higher real bond yields, which should undermine the apparently attractive valuation story for local equities. If we are correct in our assessment, the next few years should be good for Brazilian fixed income assets, but not necessarily for equities. However, we believe there are a few interesting investment themes in the local equity market and we are currently positioning some stocks which should benefit from them. For instance, we like private sector banks, insurance companies which tend to do well during periods of higher for longer interest rates. Andre Loes: Finally, what are some key upcoming events and catalysts our listeners should be aware of, Gui? Gui Paiva: Well, from a global perspective, Andre, we do expect the U.S. Fed to reach its peak rate of 4.625% in March and then stop. Therefore U.S. payrolls and inflation data are key for the outlook of U.S. monetary policy and therefore global risky assets. Meanwhile, in China, the latest batch of economic indicators has surprised to the upside, and we do expect the trend to continue in Q2. Finally, regionally, in Mexico, we expect the central bank, Banxico, to end the current monetary tightening cycle at 10.75% in February, while in Brazil, the newly elected government should try to push through Congress an important tax reform and a new long term fiscal framework during Q2. Gui Paiva: Andre, thanks very much for your questions and for taking the time to talk. Andre Loes: Great speaking with you Gui. Gui Paiva: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts, and share the podcast with a friend or colleague today.

7 Helmi 20238min

As new gene therapies are researched, developed and begin clinical trials, what hurdles must genetic medicine overcome before these therapies are commonly available? Head of U.S. Pharmaceuticals Terence Flynn and Head of U.S. Biotech Matthew Harrison discuss. ----- Transcript -----Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Head of U.S. Pharma for Morgan Stanley Research. Matthew Harrison: And I'm Matthew Harrison, Head of U.S. Biotech. Terence Flynn: And on this special episode of Thoughts on the Market, we'll be discussing the bold promise of genetic medicine. It's Monday, February 6th, at 10 a.m. in New York. Terence Flynn: 2023 marks 20 years since the completion of the Human Genome Project. The unprecedented global scientific collaboration that generated the first sequence of the human genome. The pace of research in molecular biology and human genetics has not relented since 2003, and today we're at the start of a real revolution in the practice of medicine. Matthew what exactly is genetic medicine and what's the difference between gene therapy and gene editing? Matthew Harrison: As I think about this, I think it's important to talk about context. And so as we've thought about medical developments and drug development over the last many decades, you started with pills. And then we moved into drugs from living cells. These are more complicated drugs. And now we're moving on to editing actual pieces of our genome to deliver potentially long lasting cures. And so this opens up a huge range of new treatments and new opportunities. And so in general, as we think about it, they're basically two approaches to genetic medicine. The first is called gene therapy, and the second is called gene editing. The major difference here is that in gene therapy you just deliver a snippet of a gene or pre-programmed message to the body that then allows the body to make the protein that's missing, With gene editing, instead what you do is you go in and you directly edit the genes in the person's body, potentially giving a long lasting cure to that person. So obviously two different approaches, but both could be very effective. And so, Terence, as you think about what's happening in research and development right now, you know, how long do you think it's going to be before some of these new therapies make it to market? Terence Flynn: As we think about some of the other technologies you mentioned, Matthew, those took, you know, decades in some cases to really refine them and broaden their applicability to a number of diseases. So we think the same is likely to play out here with genetic medicine, where you're likely to see an iterative approach over time as companies work to optimize different features of these technologies. So as we think about where it's focused right now, it's being primarily on the rare genetic disease side. So diseases such as hemophilia, spinal muscular atrophy and Duchenne muscular dystrophy, which affect a very small percentage of the population, but the risk benefit is very favorable for these new medicines. Now, there are currently five gene therapies approved in the U.S. and several more on the horizon in later stage development. No gene editing therapies have been approved yet, but there is one for sickle cell disease that could actually be approved next year, which would be a pretty big milestone. And the majority of the other gene editing therapies are actually in earlier stages of development. So it's likely going to be several years before those reach the market. As, again as we've seen happen time and time again in biopharma as these new therapies and new platforms are rolled out they have very broad potential. And obviously there's a lot of excitement here around these genetic medicines and thinking about where these could be applied. But I think before we go there, Matthew, obviously there are still some hurdles that needs to be addressed before we see a broader rollout here. So maybe you could touch on that for us. Matthew Harrison: You're right, there are some issues that we're still working through as we think about applying these technologies. The first one is really delivery. You obviously can't just inject some genes into the body and they'll know what to do. So you have to package them somehow. And there are a variety of techniques that are in development, whether using particles of fat to shield them or using inert viruses to send them into the body. But right now, we can't deliver to every tissue in every organ, and so that limits where you can send these medicines and how they can be effective. So there's still a lot of work to be done on delivery. And the second is when you go in and you edit a gene, even if you're very precise about where you want to edit, you might cause some what we call off target effects on the edges of where you've edited. And so there's concern about could those off target effects lead to safety issues. And then the third thing which we've touched on previously is durability. There's potentially a difference between gene therapy and gene editing, where gene editing may lead to a very long lasting cure, where different kinds of gene therapies may have longer term potential, but some may need to be redosed. Terence, as we turn back to thinking about the progress of the pipeline here, you know, what are the key catalysts you're watching over 23 and 24? Terence Flynn: You know, as everyone probably knows, biopharma is a highly regulated industry. We have the FDA, the Food and Drug Administration here in the U.S., and we have the EMA in Europe. Those are the bodies that, you know, evaluate risk benefit of every therapy that's entering clinical trials and ultimately will reach the market. So this year we're expecting much of the focus for the gene editing companies to be broadly on regulatory progress. So again, this includes completion of regulatory filings here in the U.S. and Europe for the sickle cell disease drug that I mentioned before. And then something that's known as an IND filing. So essentially what companies are required to do is file that before they conduct clinical trials in humans in the U.S. There are companies that are pursuing this for hereditary angioedema and TTR amyloidosis. Those, if successful, would allow clinical trials to be conducted here in the U.S. and include U.S. patients. The other big thing we're watching is additional clinical data related to durability of efficacy. So, I think we've seen already with some of the gene therapies for hemophilia that we have durable efficacy out to five years, which is very exciting and promising. But the question is, will that last even longer? And how to think about gene therapy relative to gene editing on the durability side. And then lastly, I'd say safety. Obviously that's important for any therapy, but given some of the hurdles still that you mentioned, Matthew, that's obviously an important focus here as we look out over the longer term and something that the companies and the regulators are going to be following pretty closely. So again, as we think about the development of the field, one of the other key questions is access to patients. And so pricing reimbursement plays a key role here for any new therapy. There are some differences here, obviously, because we're talking about cures versus traditional chronic therapies. So maybe Matthew you could elaborate on that topic. Matthew Harrison: So as you think about these genetic medicines, the ones that we've seen approved have pretty broad price ranges, anywhere from a million to a few million dollars per patient, but you're talking about a potential cure here. And as I think about many of the chronic therapies, especially the more sophisticated ones that patients take, they can cost anywhere between tens of thousands and hundreds of thousands of dollars a year. So you can see over a decade or more of use how they can actually eclipse what seems like a very high upfront price of these genetic medicines. Now, one of the issues obviously, is that the way the payers are set up is different in different parts of the world. So in Europe, for example, there are single payer systems for the patient never switches between health insurance carriers. And so therefore you can capture that value very easily. In the U.S., obviously it's a much more complicated system, many people move between payers as they switch jobs, as you change from, you know, commercial payers when you're younger to a government payer as you move into Medicare. And so there needs to be a mechanism worked out on how to spread that value out. And so I think that's one of the things that will need to evolve. But, you know, it's a very exciting time here in genetic medicine. There's significant opportunity and I think we're on the cusp of really seeing a robust expansion of this field and leading to many potential therapies in the years to come. Terence Flynn: That's great, Matthew. Thanks so much for taking the time to talk today. Matthew Harrison: Great speaking with you, Terrence. Terence Flynn: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on Apple Podcasts app. It helps more people to find the show.

6 Helmi 20237min

After a year of falling assets, 2023 has started strong for global markets. Chief Cross-Asset Strategist Andrew Sheets outlines which markets could sustain their momentum.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 3rd at 2 p.m. in London. 2022 was a year where almost all assets fell. 2023 so far has been the opposite. Stocks in China, Japan, Europe and the U.S. are all off to unusually good starts. Meanwhile, U.S. long term bonds have actually risen more than the stock market. But behind this widespread strength are some rather different stories. I want to talk through these and how they inform our view of where this strength could continue, or not. One set of strength is coming out of Asia, where China's reopening from COVID has been much more aggressive than expected. This is a material change of policy in the world's second largest economy, which has persisted despite a large initial rise in case numbers. That persistence has made our analysts more confident that large amounts of consumer spending could still be unlocked. While valuations in emerging markets and China equities have risen as a result of this reopening, we think they remain reasonable, and therefore our overweight equities in China, Korea and Taiwan. The second story is Europe. China's rebound is part of the narrative here, but we think a larger driver is energy. A mild winter and abundant supplies of U.S. LNG have caused the price of natural gas in Europe to fall by more than 60% since early December, and by more than 80% since late August. This decline has specific benefits reducing inflation while simultaneously easing pressures on economic growth, a proverbial win-win. But falling energy prices also have a more general benefit. For much of the last six months, the specter of a severe energy shortage has hung over Europe, discouraging investment. With the existential threat of energy shortages easing, the region is once again attracting capital. Flows by U.S. investors into European stock ETFs, for example, is on the rise, and we think continued investment flows into the region will help boost the euro. The third story, the U.S. story, is different still. Better growth in China and Europe are part of this, but we think the bigger issue is growing confidence of a so-called soft landing, where growth slows enough to reduce inflation, but not so much to cause a recession. That soft landing scenario is the base case forecast of Morgan Stanley's economists. But on several key variables, major uncertainties remain. On the one hand, the index of economic leading indicators or measures of new manufacturing orders have been surprisingly weak. But today's U.S. labor market report was extremely strong, with the lowest unemployment rate since 1969. And while inflation has been easing, every update here will remain important, including the next reading of the Consumer Price Index on February 14th. Global markets have been almost universally strong, but the drivers are quite different. We think the stories in Asia and Europe have the best chance of persisting throughout the year, while the U.S. story remains more data dependent. Stay tuned. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

3 Helmi 20233min

Emerging markets are turning bullish and China’s reopening leaves room for an increase in consumption. What sectors and industries might benefit from this upturn?----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and emerging market equity strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, in this episode I'll explain why the bull market in emerging market equities is still young. It's Thursday, 2nd of February at 8 a.m. in Singapore. In our view, the bull market in emerging market equities is still young. We entered a bull market, conventionally defined as up 20% from the trough, in the second week of January, having completed the bear market in mid-October. And bull markets typically last at least a year in our asset class, although the pace of recent market gains will probably slow. Unlike the U.S. market, earnings estimates revisions in Asia and emerging markets are now inflecting upwards, and that's why emerging equities are performing U.S. equities more rapidly even than in early 2009. And we think this outperformance is likely to continue a while longer. As we've entered a bull market the 52 week rolling beta, or measure of correlation of emerging markets versus U.S. equities, has undergone a regime shift falling from around 0.8 times in the third quarter last year to just 0.4 times currently. And even more striking, the beta of the Hang Seng index, at the leading edge of the current bull market in our asset class, compared to the S&P 500 has fallen close to zero. This is lower than at any point in the last 30 years of data and speaks to an environment of extreme decoupling and performance. These factors have led us to raise our growth stock exposure in recent months. Particularly in North Asia ex-Japan, so that's China, Korea and Taiwan, we expect those markets to continue to outperform, as is typical in the early phases of a bull market, whilst we expect Southeast Asian markets, ASEAN and India, which were defensive outperformers during the bear market to underperform as the bull market gets going. On the sector side, we're overweight semiconductors and technology hardware and think that the fourth quarter of 2022 was the trough for industry fundamentals, with recovery expected in the second half of this year as inventory reduces and demand recovers, particularly in China. Whilst we praised our emerging markets and China targets several times in recent months, we recently cut our Japan target for TOPIX given the headwind of yen strength. And we prefer Japan banks to the overall market as they're one of the few sectors that's positively leveraged to a stronger yen. Finally, we'd like to emphasize that China reopening is probably going to be more V-shaped than the consensus expects, with substantial excess savings in consumer pockets likely to support consumption through this year. Now, this factor is prima facie more bullish the energy sector, which we're also overweight, than the broad materials sector, which is more leveraged to property demand in China, which we think will be slower to recover. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and recommend Thoughts on the Market to a friend or colleague today.

2 Helmi 20233min

As reports that the White House may be considering more impactful approaches to Chinese investment restrictions reach investors, how much should they be reading into these policy deliberations?----- Transcription -----Welcome to Thoughts on the Market. Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 1st at 10 a.m. in New York. The influence of U.S. policy deliberations on financial markets was once again on display this week. Fresh reports that the White House continues to consider implementing rules that would restrict some investments in China, shouldn't surprise regular listeners of this podcast. After all, the U.S. government has been quite public about its intention to keep U.S. resources from supporting the development of key technologies in China deemed critical to U.S. economic and national security. But what might be a bit surprising was a report suggesting that one approach to achieving this goal could be quite different than many anticipated. In particular, the White House is reportedly considering blanket bans on investing in certain sectors of concern, rather than a tailored investment by investment review. Following the news, China equity markets have moved lower and many of our clients see a link. However, we think investors shouldn't read too much into one media report. We emphasize that the media reports on this topic are full of hedged and subjective language. While it could very well be true that the administration is considering this more severe approach, policy deliberations of all kinds typically consider multiple options. So, the consideration of this approach doesn't inherently mean it's the most likely outcome. But we do think one reliable read through from this report is that the U.S. is likely to enact some form of investment restrictions with regard to China. So investors do need to grapple with what this could mean. It could drive concern among investors around impacts to tech concentrated and R&D heavy sectors of the China equity markets. But also consider that such actions underscore emerging opportunities in geographies our colleagues have become quite positive on, like Mexico and India, markets that could benefit from U.S. multinationals having to shift new tech sensitive production away from China. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

1 Helmi 20232min

As the data continues to show a weakness in inflation, is it enough to convince investors that the Fed may turn dovish on monetary policy? And how are these expectations impacting Treasury yields?----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today I'll talk about expectations for the Fed's monetary policy this year, and its impact on Treasury yields. It's Tuesday, January 31st at 10 a.m. in New York. So far, 2023 seems to be 2022 in reverse. High inflation, which defined most of last year, seems to have given way to a narrative of rapidly declining inflation. Wages, the Consumer Price index, data from the Institute of Supply Management, or ISM, and small business surveys all suggest softening. And Treasury markets have reacted with a meaningful decline in yield. We've now had three consecutive inflation reports, I think of them as three strikes, that did not highlight any major inflation concerns, with two of the reports being outright negative surprises. The Fed hasn't quite acknowledged the weakness in inflation, but will the third strike be enough to convince investors that inflation is slowing, so much so that the Fed may change its view on terminal rates and the path of rates thereafter? We think it is. With inflation likely on course to miss the Fed's December projections, the Fed may decide to make dovish changes to those projections at the March FOMC meeting. And in fact, the market is already pricing a deeper than expected rate cutting cycle, which aligns with the idea of lower than projected inflation. In anticipation of the March meeting, markets are pricing in nearly another 25 basis point rate hike, while our economists see a Fed that remains on hold. The driver of our economists view is that non-farm payroll gains will decelerate further, and core services ex housing inflation will soften as well, pushing the Fed to stay put with a target range between 4.5% and 4.75%.In addition to all of this, it has become clear from our conversations with investors, and recent price action, that the markets of 2022 left fixed income investors with extra cash on the sidelines that's ready to be deployed in 2023. That extra cash is likely to depress term premiums in the U.S. Treasury market, especially in the belly -or intermediate sector- of the yield curve. Given these developments, we have revised lower our Treasury yield forecasts. We see the 10 year Treasury yield ending the year near 3%, and the 2 year yield ending the year near 3.25%. That would represent a fairly dramatic steepening of the Treasury yield curve in 2023. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

31 Tammi 20232min

Stocks have seen a much better start to 2023 than anticipated. But can this upswing continue, or is this merely the last bear market rally before the market reaches its final lows?----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 30th and 11 a.m. in New York. So let's get after it. 2023 is off to a much better start than most expected when we entered the year. Part of this was due to the fact that the consensus had adopted our more bearish view that we pivoted back to in early December. Fast forward three weeks, however, and that view has changed almost 180 degrees, with most investors now adopting the new, more positive narrative of the China reopening, falling inflation and U.S. dollar and the possibility of a Fed pause right around the corner. While we acknowledge these developments are real net positives, we remind listeners that these were essentially the exact same reasons we cited back in October when we turned tactically bullish. However, at that point, the S&P 500 was trading 500 points lower with valuations that were almost 20% lower than today. In other words, this new narrative that seems to be gaining wider attention has already been priced in our view. In fact, we exited our tactical trade at these same price levels in early December. What's happening now is just another bear market trap in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out. This FOMO has only been exacerbated by our observation that most missed the rally from October to begin with, and with the New Year beginning they can't afford to not be on the train if it's truly left the station. Another reason stocks are rallying to start the year is due to the January effect, a seasonal pattern that essentially boost the prior year's laggards, a pattern that can often be more acute following down years like 2022. We would point out that this past December did witness some of the most severe tax loss selling we've seen in years. Prior examples include 2000-2001, and 2018 and 19. In the first example, we experienced a nice rally that faded fast with the turn of the calendar month. The January rally was also led by the biggest laggards, the Nasdaq handsomely outperformed the Dow and S&P 500 like this past month. In the second example, the rally in January did not fade, but instead saw follow through to the upside in the following months. The Fed was pivoting to a more accommodative stance in both, but at a later point in the cycle in the 2001 example, which is more aligned with where we are today. In our current situation we have slowing growth and a Fed that is still tightening. As we have noted since October, we agree the Fed is likely to pause its rate hikes soon, but they are still doing $95 billion a month in quantitative tightening and potentially far from cutting rates. This is a different setup in these respects from January 2001 and 2019, and arguably much worse for stocks. A Fed pause is undoubtedly worth some lift to stocks, but once again we want to remind listeners that both bonds and stocks have rallied already on that conclusion. That was a good call in October, not today. The other reality is that growth is not just modestly slowing, but is in fact accelerating to the downside. Fourth quarter earnings season is confirming our negative operating leverage thesis. Furthermore, margin headwinds are not just an issue for technology stocks. As we have noted many times over the past year, the over-earning phenomena this time was very broad, as indicated by the fact that 80% of S&P 500 industry groups are seeing cost growth in excess of sales growth. Bottom line, 2023 is off to a good start for stocks, but we think this is simply the next and hopefully the last bear market rally that will then lead to the final lows being made in the spring, when the Fed tightening from last year is more accurately reflected in both valuations and growth outlooks. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

30 Tammi 20233min