Mike Wilson: Putting the Market Correction in Context

Financial markets can be sensitive to news cycles, but our Global Head of Fixed Income and Thematic Research offers a word of caution about reacting to recent headlines about the US presidential election.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about development in the upcoming US elections.It's Wednesday, July 17th at 10:30am in New York. Financial markets are starting to reflect the possibility of a Trump presidency. Investors may be taking cues from a few current developments. There’s the recent weakening of President Biden’s polling numbers in key swing states such as Pennsylvania, Michigan and Wisconsin. There’s also the ongoing discussion about whether he will remain the Democratic nominee. And there's also former President Trump’s increased win probabilities in prediction markets, as well as the perception that Democrats will have more trouble pursuing their agenda in the wake of the assassination attempt against him. To that end we’ve seen moves in key areas of markets sensitive to what we have argued will be the policy impacts of a Trump presidency, including a steepening of the US Treasury yield curve. But – a word of caution. These market reactions to recent political events may be rational, but it's not clear they’re sustainable. First, there are plausible ways investors’ perceptions of the likely outcomes of this election could shift. Voters can have very short memories, resulting in polls shifting to partisan priors. This happened with popular opinion on elected officials following notable incidents in recent years – such as the events of January 6th, 2021, the US withdrawal from Afghanistan, and more. Also, if President Biden were to withdraw as a candidate, it’s possible investors could perceive that a different candidate could tighten the race. For example, there have been recent surveys showing alternate Democratic candidates polling better than President Biden. Second, there’s also room for investors to misunderstand the policy path that could follow an election outcome as well as the impact of that path. For example, we’ve seen some recent press articles linking the broadening out of positive performance in the equity market to the likelihood of a Trump win on perceived benefits of friendlier tax policies that might result from this outcome. But if investors only focus on that policy, they’re not incorporating the potential offsetting effects that could come from policies that could challenge the economic growth outlook, such as higher tariffs – something former President Trump has advocated for. So bottom line, it makes sense to interrogate what seems like clear links between the upcoming election and markets.Some linkages are strong, and it’s possible that will make for a good investment strategy; others are weak and may break under scrutiny. We’ll help you sort it out here. 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.

17 Juli 20243min

Our Chief Global Cross-Asset Strategist explains why she sees a future for the 60/40 portfolio strategy, which worked well for over half a century and may continue to perform well – with some modifications.----- Transcript -----Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss the future of the 60/40 equity/bond portfolio. It’s Tuesday, July 16th, at 10am in New York.Now investors have been asking: Is the 60/40 portfolio -- which allocates 60 percent to stocks and 40 percent to bonds -- dead? After all, the last two years saw some of the worst returns of this strategy in decades. Now, we think the concerns about this widely used strategy are not unfounded, but definitely a bit exaggerated. Exactly how one thinks about the right mix of equities and bonds within this type of portfolio though will need to change.The strategy of investing 60 percent of a portfolio in equities and 40 percent in bonds to lower portfolio risk evolved from modern portfolio theory in the 1950s. To succeed, bonds must be less volatile than stocks and the correlation between stock and bond returns can't be 1 -- because that would mean a perfect positive correlation between stocks and bonds. And this correlation has been below 1 and low for a long time because growth and inflation have moved up and down in tandem for a long time. Now what does this have to do with anything, you may ask. Well, typically in an environment where equities are rallying on the back of strong growth, inflation is also increasing – which in turn means that nominal yields stay high, dampening bond returns; and vice-versa in a recessionary scenario. Now, in both of those cases, the negative stock-bond return correlations is related to the positive growth inflation correlation. Which explains why the strategy of the 60/40 equity/bond portfolio worked so well for decades, particularly in the low-vol, high-growth inflation correlation, low stock-bond returns correlation environment of the late aughts to 2010s. Unfortunately for investors though, this has not been the backdrop for the last few years. The highly unusual macro environment coming out of pandemic broke that relationship between growth and inflation, which in turn broke the relationship between stocks and bonds, led to a spike in fixed income volatility, and dragged bond returns to lowest levels in decades over the last couple of years. But we believe these factors will slowly normalize, which means 60/40-like strategies should work again. While the levels of correlation and bond volatility going forward may look different from history, and definitely different from the QE period, as long as bonds have lower risks than stocks – and there’s little to suggest they won’t – bonds will continue to be good diversifiers. But it’s important for investors to ask themselves: what could drive correlation between stocks and bonds going forward? Well, longer term, the path of correlation between the two assets depends in part on the relationship between economic growth and inflation, as I touched on earlier. And this is where AI can come in. Positive productivity shocks from GenAI tech diffusion and the energy transition may change that dynamic between growth and inflation. And at the same time, decoupling in the world’s key economic regions as a result of the transition to a multipolar world can alter the correlation between regional equities and rates. So, will the 60/40 portfolio be the strategy of the future? Or is it going to be more like 70/30 or even 50/50? Slower normalization of volatility and correlation means that a portfolio with more equity could yield better risk/reward than a 60/40 mix. On the other hand, as the world’s 65+ year-old population continues to grow over the next decades, this aging demographic may demand higher allocations to less volatile assets, even at the expense of lower returns. Or maybe, just maybe, there is another solution. Instead of a simple 60/40 like strategy, investors can look beyond government bonds to other diversifiers, and building a multi-asset portfolio with more flexibility. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

16 Juli 20244min

Our Retail analyst and U.S. Internet analyst connect the dots on how technology is helping the retail industry to cash in on the future.----- Transcript -----Simeon Gutman: Welcome to Thoughts on the Market. I'm Simeon Gutman, Morgan Stanley's Hardlines, Broadlines, and Food Retail Analyst.Brian Nowak: And I'm Brian Nowak, Morgan Stanley's US Internet Analyst.Simeon Gutman: And on this episode of the podcast, we'll hear how retailers are using technology to make a comeback and set themselves up for the future.It's Monday, July 15th at 6pm in London.Brian Nowak: And it's 1pm in New York.Simeon Gutman: Retail has taken a big hit over the last few years. The long tail of the pandemic, outbreaks of war and inflation have had a big impact on the landscape. However, our research suggests retail is finding its feet, and technology is playing a significant role.Automation, AI, and retail media are the game changers here. And we're seeing retailers of larger scale and larger size disproportionately invest in these technologies -- which means it will not benefit all retailers equally.My colleague Brian is here to help explain the technology and how these are manifesting themselves across the internet and technology landscapes. Brian, can you talk about how these things are materializing across your coverage universe?Brian Nowak: Thanks, Simeon. Across the US internet space, we're seeing early emerging use cases for Generative AI of many types. We are seeing improved targeting on the advertising side. We are seeing new diffusion and creative models being built where advertisers can create new types of advertising copy using large language models. We are seeing new forms of customer service using large language models and Generative AI. And in effect, we are seeing companies across the entire internet space better analyze their first party data to drive more new people and customers to their platforms -- to drive higher conversion and share of wallets from those customers. And ultimately more durable multiyear top-line growth, which in some cases is also leading to higher free cash flow growth over the long term as well. It's early, but it's very encouraging with what we're seeing for Generative AI and retail media across the space.Simeon Gutman: Can you talk about in more detail how retail media is influencing the success and the prospects for some of your companies?Brian Nowak: Retail media is a emerging, rapidly growing, new high margin revenue stream that is moving across the internet space. Large companies are analyzing more of their data and essentially creating new advertising units that users and consumers can click on to drive transactions. And they're finding ways to better link these advertising dollars to transactions and ultimately creating a new revenue stream that we think is going to drive more durable top-line growth -- and because of its high margin nature, also more durable, multiyear free cash flow growth. It is benefiting the commerce players. It is benefiting the online advertising players. And it's also benefiting the advertising technology players.So with that as a backdrop, Simeon, where are you seeing Generative AI, retail media, and maybe even automation, start to manifest itself throughout the retail landscape?Simeon Gutman: Those are the three pillars of technology that are influencing retailers. Taking a quick step back, what's changing is that market share in retail is concentrating and consolidating among the largest players. And if you think about the investments required for some of these new capabilities, the companies that have the greatest ability to invest should see the greatest benefits. That means that the big could get bigger at an even faster rate. And this is why the stakes in retail are growing even faster.Now with, respect to these technologies. Let's start with AI. AI is helping retailers analyze big pieces of data that they never had an ability to do in such a quick way. That could help them refine their search criteria to consumers scanning a website. That could help them improve the algorithms in a distribution center with robots creating orders.Second, speaking of robots, bringing automation to distribution centers, supply chains for retailers can cost anywhere between 2 to 6 per cent of sales. There's a significant opportunity to reduce the amount of labor -- human labor -- in these distribution centers by automating them; whether it's dry goods, whether it's grocery items, as tricky as frozen and perishable items.And then lastly, retail media, the way that you mentioned, Brian, the benefit to your companies is very similar to retailers. There are now advertising dollars that are moving into new channels, whether it's closed loop advertising in store or retail media that's appearing on websites -- where some of the larger and more successful companies have a lot of traffic and advertisers are intrigued to show them offers and deals to try to change their perception or behaviors.So those three pieces of technology are slowly transforming the retailer. So next time you step into a retail store, there may be more technology that meets the eyes.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.

15 Juli 20246min

Our Head of Corporate Credit Research explains why he expects the US Federal Reserve to make three rate cuts before the end of the year, starting in September.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why it's looking more likely that the Fed should, and will, cut interests rates several times this year.It's Friday, July 12th at 2pm in London.Last week, we discussed why the case for Fed rate cuts this year was strengthening. Credit markets generally don’t care too much about the exact timing or pace of policy rates, but they do care if a central bank is behind the curve. That’s because over the last 40 years, the worst returns for credit have repeatedly overlapped with periods where the Fed was too late in reversing tight monetary policy. After all, interest rates impact the economy with a pretty long and variable lag; and a interest rate cut today may not be fully felt in the economy for 12 months – or even longer. It’s therefore important for a central bank to be proactive. And so, with the recent US economic data softer, and the Fed appearing in little rush to act, the concern was straightforward: if the Fed is waiting for signs of economic weakness to be obvious, it will take too long to lower interest rates to blunt this. The Fed will be behind the curve. This risk of acting too late hasn’t gone away, and it’s a key reason why we think credit investors should be rooting for economic data in the second half of this year to remain solid, in line with Morgan Stanley’s base case. But this week did bring some events that suggest the Fed may start to adjust rates soon. First, in testimony before the US Congress, Chair Powell repeatedly emphasized that the risks for the US economy are becoming more balanced. Previously, the Fed had appeared to be much more focused on an upside scenario where conditions are hotter rather than a scenario where growth slowed unexpectedly. Second, in data released yesterday, US Consumer Price Inflation – or CPI – came in lower than expected. Overall, prices actually fell month-over-month, something that hasn’t happened since May of 2020, a time when the pandemic was raging, and Fed rates were near zero percent. Morgan Stanley’s base case is that moderating inflation will lead the Fed to cut interest rates by 25 basis points in September, November and December of this year. For credit, the question of “what do these rate cuts” mean is an ‘and’ statement. If the Fed is lowering rates and growth is holding up, you are potentially looking at a mid-1990s scenario, the best period for credit in the modern era. But if the Fed is cutting and growth is weak … well, over and over again, that has not been good. We remain constructive on credit, expecting three Fed rate cuts this year to coexist with moderate growth. But weaker data remains the risk. For credit, good data is good. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

12 Juli 20243min

Our Freight Transportation & Airlines Analyst discusses the key takeaways from his mid-year corporate travel survey, which includes a number of positive trends for the second half of 2024.----- Transcript -----Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan Stanley’s Freight Transportation and Airlines analyst. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss my expectations for corporate travel in the second half of this year. It’s Thursday, July 11th, at 10am in New York. More and more business travelers are packing their bags and taking a flight for business meetings. In fact, our corporate travel survey suggests that a record 50 percent of respondents marked their travel itineraries as returning to pre-COVID levels. As well, corporate travel budgets are expected to be up five to seven percent year-over-year in 2024, and about six percent in 2025. This means significantly more flights, hotels and car bookings for corporate travel.Interestingly, this is the first survey since 2021 that larger enterprises were more optimistic on corporate travel demand compared to smaller enterprises.The shift to virtual meetings over the next two years will likely be stable. Companies continue to predict that 12-13 percent of travel volume will be replaced by virtual meetings in 2024 and 2025. Looking ahead, respondents expect this level to hold through 2025, supporting some level of permanent shift we think.For US airlines specifically, we have started to see more signs of life within the corporate space. Several US airlines are pointing to noticeable improvement in the first quarter after fairly stagnant volumes at the end of 2023. We also saw a reversal from prior surveys with larger corporations recovering faster than smaller enterprises, which had initially led the post-COVID recovery.This positive trend in airline demand is supportive of our attractive view on US aerospace, as well. Even though global air traffic has already reached pre-COVID-19 levels, it is still about 32 percent below where the trendline would have been if COVID-19 had not happened, which leaves more room for growth.For business aviation, private jet use should remain strong and stable as a large majority of survey participants are not planning to change their business jet travel. Higher interest rates and a potentially slowing economy could lead to a potential slowdown in business jet demand, but this hasn’t happened so far as there continues to be limited excess capacity in the industry as well as continued strong demand for aircraft.Our colleagues in Europe note that although near-term indicators are positive, 40 percent of European respondents now do not expect corporate travel volumes to return to 2019 levels. This is concerning for the longer-term prospects of European corporate demand growth, which appears to be weaker than US growth.Whether you're flying private jets or commercial, or choosing to keep your team meetings virtual, we'll continue to monitor corporate travel trends, and let you know of any updates to those flight manifests. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

11 Juli 20243min

U.S., French and Indian elections may have a minimal effect on equity markets, particularly in the short term, according to our Global Head of Fixed Income and our Chief Global Cross Asset Strategist.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Serena Tang: And I'm Serena Tang, chief Global Cross Asset Strategist,Michael Zezas: And on this episode of the podcast, we'll discuss what the elections in the US and Europe mean for global markets.It's Wednesday, July 9th at 10am in New York.As investors digest the results of the French election and anticipate the upcoming US presidential election, there's some key debates that are surfacing. And so I wanted to sit down with Serena to dig into these issues that are top of mind for investors.Serena, do you expect the upcoming US elections will impact markets in the run up to November?Serena Tang: Significantly, not likely -- because if we look at history, for stocks for example, in any election year, returns don't look significantly different from any other year.Serena Tang: My team ran some cross asset analysis on market behavior in and out of prior US elections using as much data as we have. And what has been very interesting is that whether a Democrat or Republican candidate eventually takes the White House, that doesn't change the trend of returns into an election.The form of the future elected government, whether it is divided or unified, that has also never really bothered stock markets before the vote. And you can see very, very similar patterns in bond yields, the dollar and gold. Now, what this means is that even if an investor has perfect foresight and know the results of the elections now, it won't necessarily give them an edge over the next few months.Serena Tang: Now, beyond the election is really when you see performance in various election outcome scenarios really diverge. So, whether the election was tight or not seemed to have led US rates to see very different levels of returns 12 months out from an election. Whether the outcome means a unified or divided government saw very large swings in gold prices.Now there are a lot of caveats. Every election is different. The economic conditions in every election is different. And as much as we talk about other historical periods, the truth is there aren't a lot of data points to work with. Data for S&P 500 going back to 1927 reaches the most far back among the major markets, but even then it only covers 23 presidential elections.So what I'm trying to say is there have been a lot of presidents, but there aren't a lot of precedents, at least for markets.Michael Zezas: The US election isn't the only election making headlines this year. For example, we just had an election in France that had a surprising result. How does the outcome there affect your outlook on the market?Serena Tang: It doesn't, in short. It doesn't change our bullish view on European equities at all. As you know, we have been constructive on that market since January and added significant exposure in our asset allocation then -- very much on the back of our European equity strategist Marina Zavolok coming out with an out of consensus bullish call for European stocks.Serena Tang: We like the market because of its cheap optionality and convexity. It has about 20 per cent revenue exposure to US but at much cheaper valuation. And it has about 20 per cent revenue exposure to EM, meaning should we get a growth surprise to the upside; you're geared to that but at much lower volatility than owning EM equities outright.Now, none of this has changed post French elections, and we also don't see significant increase in bearish tail risks. If you look at other markets like Euro IG corporate credit or the euro, those markets are suggesting risks in France are idiosyncratic, not systemic. So we maintain our overweight in European stocks.Serena Tang: Everything that I just said is also true for our bullish view on Indian equities, even after elections a month ago. Ridham Desai, head of India research, argued the election outcome there is likely to usher in more structural reforms and really reinforces our forecast of 20 per cent annual earnings growth over next five years, sustaining India's longest and strongest bull market ever. Bullish secular factors for Indian equities have not changed and therefore our bullish view on Indian equities have not changed.Michael Zezas: And elections have consequences for how countries interact with one another. And how their policies differ from one another. And one area of the markets that tend to be sensitive to this is the foreign exchange markets. So are there any impacts you're looking for around foreign currencies?Serena Tang: Yes, in particular, the dollar. But let me start with the euro first. Because I talked earlier about our bullish view on European equities; and in fact, in our asset allocation, we actually have a higher allocation to Europe versus US for stocks, bonds, and corporate credit bonds. The one European market we're more cautious on is the euro. And this actually has nothing to do with the French election results, per se -- because what matters now really is dollar strength. Now, part of this is a rates differential issue. Our US economics team are expecting the Fed to start cutting in September, while the ECB, of course, has already started easing policy. So yield differentials really favor the dollar here.But we also need to factor in the election, which seems to be the theme for today. Our FX [foreign exchange] strategy team thinks markets really need to start pricing in material likelihoods of dollar positive changes in US fiscal, foreign and trade policy as the election approaches. Meaning the dollar will continue its modest uptrend into the second half. And geopolitical uncertainty, of course, will also be dollar positive.Michael Zezas: So bottom line then. Elections clearly have consequences for markets but in the run-up to an election, there might not be a reliable pattern.Serena Tang: Exactly.Michael Zezas: Great. Well Serena, thanks for taking the time to talk.Serena Tang: Great speaking with you, Mike.Michael Zezas: And as a reminder, if you enjoy the podcast, please take a moment to rate and review us wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

10 Juli 20246min

Record-high prices remain a key concern for buyers in the U.S. housing market. Our Co-Heads of Securitized Product Research dig into the data, explaining why they still believe a deceleration in home price growth will come.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. It's Tuesday, July 9th, at 1pm in New York. Jay Bacow: Jim, housing headlines just keep coming. Home prices are at record highs. What does that mean? How should we be thinking about that? James Egan: So, that has been a fun headline, and according to several measures of home prices, we are at record highs. But, let's put that into context. We've actually set a new record high for home prices every month for the past ten months. In fact, prior to a 12-month hiatus from July of ’22 to June of ’23, home prices had actually hit a new record high every month for 68 consecutive months. Jay Bacow: Alright, so if we're just talking about levels, it's important. But given that I'm a physicist by training, so are rates of change; and for that matter, changes to the rate of change, or acceleration, if you will. If there's something different about the current record of US home prices that is worth discussing, that would be interesting. James Egan: We think there is. Actually two months ago, home prices set a new record high. But it was also the first time in ten months that the pace of year-over-year home price appreciation did not accelerate. This month the pace of appreciation actually started to decelerate. As listeners of this podcast might remember, we've been calling for the pace of year-over-year home price appreciation to slow from above 6.5 per cent to just two percent by December. We are still above six percent today, but this could be the beginning of that deceleration. Jay Bacow: Right. And if there's going to be deceleration, Newton would say there needs to be some force that causes it. And my understanding is you thought that that force that causes it would be sale inventories increasing. Has that been the case? James Egan: Indeed, it has been actually. Total for sale inventory has increased for six consecutive months. And the pace of that growth is accelerating. Now, we do want to highlight that overall supply remains very tight. That part of the housing narrative hasn't changed. If we take a step back and look at the whole market, total months of supply are at just 4.5 per cent. Anything below six is really considered a seller's market there. On the other hand, this is the highest level that the market has experienced since the first half of 2020, which is another argument in our minds for the pace of home price appreciation to decelerate. But once we remove these pandemic era lows, four and a half months is close to the lowest level of the past 30 plus years. Jay Bacow: Alright, now sticking on the level context. Home prices weren't just the only thing that set a record level these days. Pending home sales just set a new record low in May. James Egan: Right, that's also the case. Now, we do want to put the record into context here. The pending home sales index that we're referring to only goes back to 2001. But over that 23 plus years, the May print was the lowest number that we've seen. Jay Bacow: Alright, so given all of that, how are you thinking about demand for housing amidst increasing supply? James Egan: Right. So this is a pretty important question. When it comes to demand at these levels, affordability remains very challenged. One of the primary questions for the US housing market moving forward is going to be the interplay between the absolute level of affordability and the direction and rate of change. Now, we are far from being able to declare a winner here. Sales volumes have increased off of 12 year lows from the fourth quarter of 2023; but at the same time, there are several demand indicators that are having trouble achieving liftoff, if you will. Pending home sales, for instance. They're not falling as fast as they have been, over the past two plus years; but they're also having a hard time achieving some sort of escape velocity as they continue to fall on a year-over year-basis. Mortgage applications for purchase -- another one of our leading indicators -- they're experiencing a similar dynamic. The first half of 2024 has been a noticeable second derivative improvement versus 2023, but that improvement has slowed and applications are still falling on a year-over-year basis. Now, part of this is going to be a function of mortgage rates going forward. Jay, what are we thinking there? Jay Bacow: Now, the biggest driver of mortgage rates is going to be the level of treasury rates. And our rate strategists are forecasting treasury rates to fall over the end of this year and into the middle of next year. If that happens, we would expect mortgage rates to get towards 6.25 to 6.5 per cent by next summer -- clearly materially lower than they are right now. But once again, the biggest driver of this is treasury rates. Not what's going on with the mortgage market. James Egan: And we continue to expect with that decrease affordability to improve, and that to drive year-over-year growth and sales in the second half of 2024 versus 2023. But it doesn't have to be a straight line to that outcome. And how are you thinking Jay, from a mortgage market perspective about sales volumes? Jay Bacow: So, the mortgage market is in a pretty interesting spot because there's almost two sides of it. There's the existing mortgage market, which is mostly made up of homeowners that have very low mortgage rates, and thus the coupon to the investor is relatively low; and they're trading at a discount. If turnover is low, then those bonds are outstanding for longer, which is bad for those investors. But, if that turnover is low, that means the supply to the market in the new higher coupon mortgages is relatively low, which is good for those investors in the new higher coupon mortgages. In effect, if turnover is lower, it's good for higher coupon mortgages, not so good for lower coupon mortgages. James Egan: And that's why all of this is so critical. If I were to, to summarize, we're paying attention to increasing inventory volumes in the housing market. We're paying attention to some of these demand statistics that are coming in a little softer than at least consensus estimates expected them to. We do think that home price growth is going to decelerate as a result. We also think it will remain positive. There continues to be very little overall supply in the US housing market. Jay, it was nice speaking with you. Jay Bacow: Jim, nice talking physics in the housing market with you. James Egan: Thanks for listening. And if you enjoyed this podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

9 Juli 20246min

Inflation continues to be a key issue for voters in elections around the world. Our CIO and Chief US Equity strategist explains its potential influence on the upcoming US presidential election, and how investors may react to potential outcomes of this race.----- 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 consequences of elections on policy and markets. It's Monday, July 8th at 2:30pm in New York. So let’s get after it. Several important elections around the world have taken place with important implications for policy and markets. Most notably, elections in India, Mexico, the UK and France have all garnered the attention of investors.While these elections are unique to each country, there does appear to be a growing focus on the issue of economic inequalities and immigration. While these inequalities have been building for decades, the COVID pandemic and policies implemented to deal with it have ushered in a higher focus on these disparities and a general level of uncertainty about the future on the part of many citizens.Of all the changes affecting the average person most adversely, inflation stands out as the most challenging. While the rate of change on inflation has been steadily falling since 2022, the price level of a number of goods and services remains challenging for many. Prices for basic items like food, shelter, healthcare, insurance and utilities are 30 to 50 per cent higher than they were pre-pandemic. Offsetting some of this increase has been the rise in home equity and financial asset prices, but this only helps those who are asset owners. Fixed rate mortgages have also been a notable positive offset to rising prices and interest rates. For many, there is a natural arbitrage between these pre-existing, historically low mortgage rates and money market rates. Once again, such an arbitrage is only available to those who have large piles of cash.In our view, these dynamics further the case that inflation is going to play a major role in this year's upcoming U.S. election much like it is having an impact globally. The recent US Presidential debate prompted inquiries from investors on what a potential Trump win or a potential Republican sweep could mean for markets. Based on initial market reactions and our conversations with clients, there is a consistent view that both growth and longer-term interest rates could move higher under this outcome. This has led to a greater appetite to rotate one’s equity portfolio toward value and cyclical stocks, which also worked leading into the 2016 election. Market expectations for fiscal expansion, reflation and less regulation under a Trump Presidency support such moves. However, we think there’s also a couple of important dynamics to consider. First, we would argue that the cycle is more mature today than it was in 2016 as evidenced by the two-and-a-half-year decline in the Conference Board Leading Economic Indicator and the nearly 2-year inversion of the yield curve. Given a later cycle environment is historically a backdrop where the market pays up for quality and liquidity, we advise staying up the quality curve and away from small cap cyclicals, which worked in 2016. In short, the state of the business cycle right now is more important than the election outcome. As such, we think investors should stay selective within cyclicals. Second, the market welcomed a reflationary playbook in 2016. Inflation was not a headwind to consumers in the way it is now, and the US economy was recovering from a global manufacturing recession, the recovery of which was aided by the prospects of a pro-fiscal/reflationary policy regime. Today, inflation is a notable headwind to consumers as discussed previously and fiscal sustainability dynamics remain top of mind for the bond market. 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.

8 Juli 20244min