Andrew Sheets: The Uncertainty of the Fed’s New Certainty

New data on an oral antiviral treatment could have significant impact on the COVID treatment landscape. What’s next for treatments, booster shots and child vaccines.----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, chief cross asset strategist for Morgan Stanley Research.Matthew Harrison And I'm Matthew Harrison, Biotechnology Analyst.Andrew Sheets And on this special edition of the podcast, we'll be talking about several new developments in the fight against COVID 19. It's Tuesday, October 5th at 3 p.m. in London,Matthew Harrison and it's 10:00 a.m. in New YorkAndrew Sheets So Matt. I really wanted to catch up with you today because there are a number of different storylines involving COVID 19 going on at the moment, from child vaccines to the situation with booster shots. But I suppose the headline story that's getting the most attention is data released last Friday on Merck's new oral COVID treatment pill Molnupiravir or I think I said that right. I'm sure I didn't. So maybe let's start there. What is this treatment and why does it matter?Matthew Harrison Yes. Thanks, Andrew. So Molnupiravir is an oral antiviral against COVID. The way it works is that it stops the virus from replicating effectively, and that reduces the amount of virus in someone's body. It was studied here in patients that were recently diagnosed with COVID 19. And it cut the rate of hospitalization in those patients by 50%. So those that didn't get treated with the drug went to hospital at a rate of 14%, and those that did get treated went to hospital rate of 7%. I think the thing I would want to highlight is that this is something you obviously take after you get infection and vaccines remain the primary way to prevent infection.Andrew Sheets So this is kind of one of the things I felt that was so fascinating when that news was announced. Because on the one hand, this seems like very good news, another treatment that appears highly effective against COVID 19. And yet the market reaction was actually to really punish many of the makers of the current COVID vaccines, so how much do you think this could influence the COVID treatment landscape? And do you think the market or people might be overreacting to some of the impact on whether or not people will still get vaccines or vaccines will remain important?Matthew Harrison Vaccines, their primary measure is prevention. Right? This is a drug to treat people once you get disease. But the hope is, and the way we get out of the pandemic, is still by vaccinating everybody to prevent disease from happening and disease from spreading. So, I think of this drug, along with antibodies as drugs that you use to treat people who either have breakthrough infections or those that aren't vaccinated. But you also have antibodies for people that are at higher risk, patients that might not be compliant with taking oral drugs. Or, you know, a whole another segment of the market that we haven't talked about is those that need to be protected either because they can't get a good response to the vaccine, because they're perhaps immunocompromised or otherwise, and those that need some sort of preventative treatment. Where Merck is studying this pill as a preventative treatment, but the antibodies are already authorized as preventative treatments. So, there's a different section of the landscape, I would say, for each of these drugs.Andrew Sheets So, Matt, what impact do these potentially positive results on a pill mean for vaccine hesitancy in the outlook for vaccinations?Matthew Harrison I think that's one of the things that the market is is struggling a lot with, and I think that's part of the reason you saw many of the vaccine stocks under pressure, right? There's definitely one segment of the market that thinks, if you have effective treatments, especially easy to use treatments like orals, that could give people another reason who don't want to have the vaccine to say, "Look, even if I do get sick, I do have an easy to take treatment." And so, on the margin, right, it may impact vaccination uptake, though the flip side is what I would say is I think what we're seeing in the U.S. is at least that you're seeing broad vaccination mandates and you and you are seeing those mandates lead to increases in vaccination, especially employer based mandates. And so, there are other factors driving vaccine uptake.Andrew Sheets So I think it's safe to say we care about the numbers here on this Thoughts of the Market podcast. Could you just run through the various costs of different treatments if we're thinking about vaccines, you know, potential thoughts on where an oral pill could be and then the antibody treatments, which are obviously another form of treatment that we're seeing being used. Just to give people some sense of how much the relative cost of each one of those things is.Matthew Harrison Yes, so vaccines per shot in the U.S., depending on manufacturer, run between $16.50 And $19.50 in the U.S. So a course of vaccination, let's say costs on average about $40. There are some administration fees and otherwise, but direct to drug costs. Merck has signed a contract with the US government for $1.2 Billion for 1.7 Million courses, so that runs about $700 per course for the oral right now. And then the U.S. government also has contracts with a variety of manufacturers for antibodies, which run about $2100 per course. So treatments are more expensive than vaccination and then usually with treatments, there are other associated medical costs which I didn't cover, and I don't have a great estimate for. But obviously, as those patients that might be getting treatments because they're also hospitalized, those costs are more significant.Andrew Sheets So I want to jump next to the topic of child vaccinations. Last week, Pfizer and BioNTech announced that they had submitted data to the Food and Drug Administration that their coronavirus vaccine is safe and effective in children ages 5-11. What do you think? Is the timeline ahead for the next steps here?Matthew Harrison Yes, right, so they have submitted preliminary data, but they have not submitted the final request for an emergency use authorization. The expectation here is that there will be some back and forth between Pfizer and the regulator to finalize the exact package of data after the FDA has reviewed the initial data. That will then trigger the final submission where they ask for the request for emergency use authorization. Most of us think that would occur sometime, let's say, in the next couple of weeks. And then historically right, the FDA, once they receive that final package, takes on order of two to three weeks to approve the EUA authorization. So, I think this ranges from maybe the earliest in late October towards sometime into early November.Andrew Sheets Matt, I also wanted to cover the issue of booster shots, which is the other kind of large development in the fight against COVID 19, and I think there's been a little bit of confusion on the topic. So, you know, what's the latest in terms of who is eligible for a booster in the U.S. and what the CDC is recommending?Matthew Harrison Originally the FDA had asked their external advisory committee whether or not boosters should be made available for everyone where the original vaccine was authorized, so that would be those 16 and up. The advisory committee then asked to narrow that slightly and specifically what the advisory committee asked was: those 65 years or older, as well as those at high risk, either because of underlying medical conditions or because of occupational hazard. So that would include, hospital workers or workers who are otherwise frontline workers in a high-risk scenario. The CDC has a separate committee called ACIP, which a few days later looked into this as well, and they had voted essentially for those at high medical risk and those 65 years and older. But they had said they were somewhat uncomfortable, and it was a very close vote to be clear, about those at increased occupational risk. After that meeting, the CDC themselves or the director of the CDC said that they believe the booster shot should be made available for all of those groups and essentially overrode the committee on the last piece around occupational risk. So right now, its 65 older, immunocompromised, those at high medical risk and those at high occupational risk.Andrew Sheets So Matt, the final thing I wanted to ask you about is one of the most positive things that seems to have come out of this this terrible pandemic is mRNA vaccination technology. It seems to be a type of medical technology that has really exceeded expectations for how quickly and how effectively a vaccine could be rolled out. Andrew Sheets So Matt, if you think about this technology looking ahead, what do you think are the applications that potentially could go beyond COVID? And also, at what point do you think some of these vaccinations might need to be updated and how difficult will that be?Matthew Harrison So in terms of applications and next steps for RNA, there's a wide variety of disease areas that they're looking at. But in general, the technology is being used to make missing proteins in your body, which occurs a lot with rare genetic diseases. To potentially help various tissues that may need certain proteins or enzymes to help them heal. And also looking at ways that you could, for example, with oncology patients that you could tell the body's own immune system for key flags or markers of the tumors versus normal tissue so that you could redirect the immune system to specifically go after the cancerous tumor. In terms of needing a updated COVID vaccine. I think that all depends on the variant outlook. Currently, what we see is just giving another dose of the current vaccine provides very good protection against Delta. And so, I think as we look out on the outlook, right, it's about if Delta combines with something else, then maybe there is the potential for an update. But the manufacturers are well primed for that, and that process is a couple months process, probably if they had to do that. So, they can adapt quickly.Andrew Sheets Something important to keep an eye on. As always, Matt, it's been great talking with you.Matthew Harrison Thanks, Andrew.Andrew Sheets As a reminder, 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.

5 Okt 202110min

After 16 years, German Chancellor Angela Merkel is stepping down. While the full implications for Europe remain unclear, some contours of the post-Merkel government are now taking shape.----- Transcript -----Welcome to Thoughts on the Market. I am Reza Moghadam, Morgan Stanley's Chief Economic Advisor. Along with my colleagues, we bring you a variety of market perspectives. Today, I'll be talking about the implications of the recent German elections and how investors should view the road ahead after a government is formed. It's Monday, October 4, at 2pm in London. After 16 years as German Chancellor, Mrs. Merkel is stepping down. In the run up to the recent elections, there was considerable anxiety in European capitals. Angela Merkel, after all, has been the steady hand that has guided not only Germany's but also Europe's response through numerous crises. These anxieties have not been entirely laid to rest by the results of last week's election. For the first time since 1950s, forming a government would require a coalition of at least three - rather than the traditional two - political parties, which raises concerns about cohesion of the new government. However, there are reasons to be optimistic about broad continuity - that a centrist, pro-European and pro-business coalition would eventually emerge in Berlin. There are perhaps two key issues of importance for investors as discussions get underway. First, who will succeed Mrs. Merkel? And second, what would be the exact composition of the coalition and, therefore, its policies? The candidate most likely to succeed Mrs. Merkel is Olaf Scholz, whose Social Democratic Party narrowly topped the polls. Mr. Schulz is continuity incarnate. He has been Germany's Finance Minister and vice chancellor under Mrs. Merkel. He brings strong pro-European credentials, especially having played a role in ensuring Germany's support for the European Recovery Fund, which is Europe's main vehicle for providing support for the hardest hit countries during the pandemic. Mr. Schulz has also been a very strong proponent of EU banking and capital markets unions. Is there an alternative to Mr. Schulz? Yes, the candidate who led the election campaign for Mrs. Merkel's center right Christian Democrats, Armin Laschet. However, given the poor election results for Christian Democrats and Mr. Laschet's much less favorable public standing, a German government led by Mr. Laschet is unlikely. But it is worth noting that Mr. Schulz and Mr. Laschet are both centrist politicians and not that far apart on key policies. Now let me turn to the second important issue for markets: who are the likely coalition partners for Mr. Schulz or, for that matter, Mr. Laschet? Here, the electoral mathematics are very clear. The Green Party and the pro-business Free Democrats are highly likely to be in the next government. The Greens have one key demand: €50B (or 1.5% of GDP) per year in new investment to reach net zero carbon emissions by 2050. Investment in Germany has been constrained by self-imposed austerity, and increasing investment of that magnitude is likely to underpin growth and innovation and set a benchmark for other European countries. What about the Free Democrats? They are against tax increases and fiscally conservative, but pro green investment. Therefore, they would want to ensure that any fiscal plans are business friendly, and any deficit financing limited. In summary, the contours of the post-Merkel German government are becoming clearer. There will likely be continuity through Mr. Schulz, or perhaps Mr. Laschet. There Is likely to be a strong green investment agenda, and the presence of the Free Democrats ensures support for Mr. Schulz's brand of fiscal moderation and prudence. It is also very clear that while continuing to take a cautious line on fiscal policy, the next German chancellor and government are likely to put a high premium on European solidarity. The process for forming a new government in Germany will likely take time as it requires drawing up a detailed policy agreement that respects the red lines of each political party. But the new government should be in place by the end of this year, just in time for the German presidency of the G7 in 2022. 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.

4 Okt 20215min

On part two of this special episode, Lisa Shalett and Andrew Sheets dive into meme stocks and individual investor trading advantages… and pitfalls.----- Transcript -----Andrew Sheets Welcome to Thoughts of the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.Lisa Shalett And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.Andrew Sheets And today on part 2 of the podcast, I’ll be continuing my discussion with Lisa on the retail investing landscape and the impact on markets. It's Friday, October 1st, at 2p.m. in London.Lisa Shalett And it's 9:00 a.m. here in New York City.Andrew Sheets So, Lisa, over the last 12 months, we've seen a real boom in the amount of activity in the stock market from these so-called retail investors. And, you know, given your perspective over several market cycles, you know, what do you think is kind of similar and different in terms of individual investor activity now versus what we've seen in the past?Lisa Shalett So you know what's similar to episodes of retail participation that we've seen in the past? I think the first is momentum and crowding. So, as we know in prior market cycles, you know, periods like a 1999-2000 tech bubble, for example. We had a lot of enthusiasm around stocks that perhaps didn't have great profit fundamentals or whose valuation paradigms shifted to expand beyond things like profit to things like, you know, share of eyeballs and things of that nature. And we're you know, we've certainly during this market cycle with the emergence of, you know, zero commission trading platforms, you know, seen some of that type of activity where stocks seem to be moving based on other dynamics, be they momentum, be they you know, social media chatter.Lisa Shalett Obviously, I think one of the things that is different is this role of social media. I think that this idea that a set of investors will crowd or attempt to drive the market through social media postings is an interesting one, if you will. And I think we're going to need to see how it plays out. But I think what we know is very often when we get into periods in the market where we're drawing in a large share of brand-new investors, you know, they are not particularly experienced and they, you know, seemingly have had success by dint of, you know, the benign nature of the environment, which is what we've kind of had. We've had a relatively low vol, high central bank involvement environment. We know how these parties tend to end. And since this seems to happen every couple of times in a generation, this generation of new investors, I think, you know, may be set up to, you know, quote unquote, learn the hard way. But that remains to be seen.Andrew Sheets Lisa, I know another question that you spend a lot of time thinking about is whether or not investors should look to be active or passive in how they're trying to take exposure to markets. How are you thinking about that and kind of what type of environment do you think we're in today?Lisa Shalett We try to take a pretty, you know, systematic and methodical and analytic approach to the active/passive decision. We want to make sure that when we're giving advice that if we think that there's idiosyncratic alpha opportunity out there above and beyond what, you know, the passive market can deliver and we're asking our clients to pay for it, that it's there and with high probability and that it exists. And so, you know, what are the environments where that tends to be true? What we have found is it tends to be environments where you have large valuation dispersions in the market, where you have high levels of controversy in terms of earnings estimate dispersion, tends to be environments where there could be policy inflection points. And so based on some of those type of variables, over the last two to three months, our models have moved us to a maximum setting towards active management. When we look at the passive index today, one of the things that, you know, we continue to point out to our clients is the extent to which the S&P 500 index, for example, has become very concentrated in a short list number of names. So, you know, we contrast that recommendation that we're making right now for a maximum stock picking or maximum active manager selection stance with, you know, perhaps where we were at the beginning of the cycle last March when policy actions are so profound in terms of driving liquidity and the stimulus was coming from the federal government. When you're in an environment where "the rising tide lifts all the boats" and performance dispersion is very narrow and you have, you know, very high breadth where, you know, almost all stocks are rising and they're rising together. Those are certainly markets that are very well played using the passive index. But that's how we make that contrast. And today we are trying to encourage our clients to move to a more active stance where they're reducing their vulnerability to some of the characteristics of the S&P 500 index that we think are fragile.Andrew Sheets Very interesting. So, Lisa the last question I want to ask you is when you think about that retail, that individual investor, what do you think are actually the advantages that this group has, maybe underappreciated advantages? And then what do you think are kind of some of the most common pitfalls that you see and strategies to try to avoid?Lisa Shalett Yeah, no, that's a great question. So, one of the advantages of being an individual investor is you can truly take a long-term view. At least most of our clients can. And so, they don't need to worry about, "mark to market," they don't need to worry about quarterly returns and quarterly benchmarks. They don't even need to worry about benchmarks at all, quite frankly. And that allows the individual investor to take a long view, to be patient to utilize tools like dollar cost averaging in over time and to not necessarily have to buy into the pressures of market timing.Lisa Shalett I think the pitfalls for individual investors are you know, individual investors are just that, they are individuals. Individual investors tend to be motivated by very human behavioral finance concepts of fear and greed. And so, I think one of the things that very often we as private wealth advisors battle are emotions. And when our clients, you know, feel a degree of fear, they will do things that potentially are drastic, i.e., they will, you know, sell and take profit and incur a tax event and get out of the market. And then the challenges of market timing, as we know, are always twofold. Right? If you're going to get out, you've got to have a discipline of when to get back in. And we know that those two things: getting in and getting out, are very hard to do and do well without destroying wealth, without concretizing losses and without, you know, leaving money on the table. So, you know, I think the value of advice, as we always say, is keeping clients in that first bucket, keeping them attached to a long run, process driven plan that avoids market timing, that allows you to take the long view, that measures things in years, not quarters and months, and avoid some of the pit falls.Andrew Sheets I think that's a great place to end it. Lisa, thanks for taking the time to talk and we hope to have you back soon.Lisa Shalett Thank you very much, Andrew. I appreciate it.Andrew Sheets As a reminder, if you enjoy Thoughts of the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

1 Okt 20217min

On part one of this Special Episode, Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, discusses the new shape of retail investing and the impact on markets.----- Transcript -----Andrew Sheets Welcome to Thoughts of the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.Lisa Shalett And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.Andrew Sheets And today on the podcast, we'll be discussing the retail investing landscape and the impact on markets. It's Thursday, September 30th, at 2p.m. in London.Lisa Shalett And it's 9:00 a.m. here in New York City.Andrew Sheets Lisa, I wanted to have you on today because the advice from our wealth management division is geared towards individual investors, what we often call retail clients instead of institutional investors. You tend to take a longer-term perspective. As chief investment officer, you're juggling the roles of market analyst, client adviser and team manager ultimately to help clients with their asset allocation and portfolio construction.Andrew Sheets Just to take a step back here, can you just give us some context of the level of assets that Morgan Stanley Wealth Management manages and what insight that gives you potentially into different markets?Lisa Shalett Sure. The wealth management business, especially after the most recent acquisition of E-Trade, oversees more than four trillion dollars in assets under management, which gives us a really extraordinary view over the private wealth landscape.Andrew Sheets That’s a pretty significant stock of the market there we have to look at. I'd love to start with what you're hearing right now. How are private investors repositioning portfolios and thinking about current market conditions?Lisa Shalett The individual investor has been incredibly important in terms of the role that they're playing in markets over the last several years as we've come out of the pandemic. What we've seen is actually pretty enthusiastic participation in in markets over the last 18 months with folks, you know, moving, towards their maximum weightings in equities. Really, I think over the last two to three months, we've begun to see some profit taking. And that motivation for some of that profit taking has as kind of come in two forms. One is folks beginning to become concerned that valuations are frothy, that perhaps the Federal Reserve's level of accommodation is going to wane and, quite frankly, that markets are up a lot. The second motivation is obviously concern about potential changes in the U.S. tax code. Our clients, the vast majority of whom manage their wealth in taxable accounts, even though there is a lot of retirement savings, many of them are pretty aggressive about managing their annual tax bill. And so, with uncertainty about whether or not cap gains taxes are going to go up in in 2022, we have seen some tax management activity that has made them a little bit more defensive in their positioning, you know, reducing some equity weights over the last couple of weeks. Importantly, our clients, I think, are different and have moved in a different direction than what we might call overall retail flow where flows into ETFs and mutual funds, as you and your team have noted, has continued to be quite robust over, you know, the last three months. Andrew Sheets So, Lisa, that's something I'd actually like to dig into in more detail, because I think one of the biggest debates we're having in the market right now is the debate over whether it's more accurate to say there's a lot of cash on the sidelines, so to speak, that investors are still overly cautious, they have money that can be put into the market. You know, kind of versus this idea that markets are up a lot, a lot of money has already flowed in and actually investors are pretty fully invested. So, you know, as you think of the backdrop, how do you think about that debate and how do you think people should be thinking about some of the statistics they might be hearing?Lisa Shalett So our perspective is, and we do monitor this on a month-to-month basis has been that that, you know, somewhere in the June/July time frame, you know, we saw, our clients kind of at maximum exposures to the equity market. We saw overall cash levels, had really come down. And it's only been in the last two to three weeks that we've begun to see, cash levels rebuilding. I do think that that's somewhat at odds with this thesis that there's so much more cash on the sidelines. I mean, one piece of data that we have been monitoring is margin debt and among retail individual investors, we've started to see margin debt, you know, start to creep up. And that's another indication to us that perhaps this idea that there's tons of cash on the sidelines may, in fact, not be the case, that people are, "all in and then some," you know, may be something worth exploring in the data because we're starting to see that.Andrew Sheets So, Lisa, the other thing you mentioned at the onset was a focus on the tax environment, and that's the next thing I wanted to ask you about. You know, I imagine this is an issue that's at the top of minds of many investors. And your thoughts on both what sort of reactions we might get to different tax changes and also your advice to how individuals and family offices should navigate this environment.Lisa Shalett Yeah, so that's a fantastic question, because in virtually every meeting, you know, that I'm doing right now, this question comes up of, you know, what should we be doing? And we usually talk to clients on two levels. One is on it in terms of their personal strategies. And what we always talk about is that they should not be making changes in anticipation of changes in the law unless they're really in need of cash over the next year or two. It's really a 12-to-18-month window. In which case we would say, you know, consult with your accountant or your tax advisor. But typically, what we say is, you know, the changes in the tax law come and go. And unless you have an imminent, you know, cash flow need, you should not be making changes simply based on tax law. The second thing that we often talk about is this idea or this mythology among our client base that changes in the tax law, you know, cause market volatility. And historically that there's just no evidence for that. And so, like so many other things there's, you know, headline risk in the days around particular news announcements. But when you really look at things on a 3-month, 6-month, you know, 12- and 24-month trailing basis on some of these things, they end up not really being the thing that drives markets.Andrew Sheets Lisa, one of the biggest questions—well, you know, certainly I'm getting but I imagine you're getting as well—is how to think about the ratio of stocks and bonds together within a portfolio. You know, there's this old rule of thumb, kind of the 60/40, 60% stocks, 40% bonds in portfolio construction. Do you think that's an outdated concept, given where yields are, given what's happening in the stock market? And how do you think investors should think about managing risk maybe differently to how they did in the past?Lisa Shalett Yeah, look, that's a fantastic question. And it's one that we are confronted with, you know, virtually every day. And what we've really tried to do is take a step back and make a couple of points. Number one, talk about goals and objectives and really ascertain what kinds of returns are necessary over what periods of time and what portion of that return, you know, needs to be in current cash flow, you know, annualized income. And try to make the point that perhaps generating that combination of capital appreciation and an income needs to be constructed, if you will, above and beyond the more traditional categories of cash, stocks and bonds given where we are in terms of overall valuations and how rich the valuations are in both stocks and bonds, where we are in terms of cash returns after inflation, and with regards to whether or not stocks and bonds at the current moment are actually behaving in a way that, you know, you're optimizing your diversification.Lisa Shalett So with all those considerations in mind, what we have found ourselves doing is speaking to the stock portion of returns as being comprised not only of, you know, the more traditional long-only strategies that we diversify by sector and by, you know, global regions. But we're including thinking about, you know, hedged vehicles and hedge fund vehicles as part of those equity exposures and how to manage risk. When it comes to the fixed income portion of portfolios, there's a need to be a little bit more creative in hiring managers who have a mandate that can allow them to use things like preferred shares, like bank loans, like convertible shares, like some asset backs, and maybe even including some dividend paying stocks in their income generating portion of the of the portfolio. And what that has really meant to your point about the 60-40 portfolio is that we're kind of recrafting portfolio construction across new asset class lines, really. Where we're saying, OK, what portion of your portfolio and what products and vehicles can we rely on for some equity like capital appreciation and what portion of the portfolio and what strategies can generate income. So, it's a lot more mixing and matching to actually get at goals.Andrew Sheets Tomorrow I’ll be continuing my conversation with Lisa Shalett on retail investing and the implications for markets. As a reminder, if you enjoy Thoughts of the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

30 Sep 20219min

The eventual size of the Democratic Party’s fiscal policy legislation – for taxes and for spending – will likely impact the bond market as well as the policy landscape.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between US public policy and financial markets. It's Wednesday, September 29th at 1:00 p.m. in New York. It's shaping up to be one of the most consequential legislative weeks on record in the US. At stake is the size and fate of Democrats' fiscal policy ambitions, specifically their goals of a major tax increase to fund a substantial expansion of infrastructure spending and the social safety net. But intraparty disagreements on the content of these efforts have left investors wondering: what will the final package do to the U.S. fiscal outlook and, therefore, the trajectory for bond yields? Will the Democrats go big, keeping yields moving higher, or go small, potentially meaning the worst of the recent increase in bond yields is behind us? Our current thinking is that the Democrats eventually end up going big. Why? Because neither of the two legislative vehicles they're considering are possible without the other - they're linked. Moderates, particularly in the Senate, may be happy with approving the smaller bipartisan infrastructure framework, or BIF. But progressives don't appear content with just this achievement and continue to argue they'll withhold their votes on the BIF until the whole of the party endorses a specific plan for the bigger budget reconciliation bill. This de facto linking of the two bills may mean that Democrats' planned votes this week to pass the BIF gets delayed, but it keeps the party on track for what we think would be a combined increase in spending of over $3T over 10 years, adding upwards of $1T to the deficit over the first five years. That would help keep support under the economic recovery and the upward trajectory of bond yields over the medium term. It could also mean equity markets are choppy in the near term as they digest a meaningful incoming tax hike. But breaking that link and going small is something we have to consider too. If progressives give in and vote for the BIF without a dependable agreement on reconciliation, the moderates will be in the driver's seat on the rest of the negotiation - and already key moderate Democratic leaders have said they'd delay the timing and dilute the size of the reconciliation bill. In that case, we'd substantially mark down our expectations for the impact to deficits, as well as for the scope of tax hikes. For this outcome to become more likely, look for a public signal from the White House to persuade progressives to vote for the BIF by explicitly endorsing the strategy of voting on it before reconciliation is agreed to. We hope this can be a guide to track how the situation develops over the next few days. And we’ll of course be paying close attention and be back next week to size it all up again. 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.

30 Sep 20212min

With incoming global growth data missing consensus expectations, emerging markets equity earnings revisions could fall back into negative territory for the first time since May 2020.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you their perspectives, today I'll be talking about a key recent development, which is the deterioration in the global growth outlook and what it means for Asia and EM equities. It's the 29th of September at 7:30 a.m. in Hong Kong. Incoming global growth data is starting to miss expectations by a wide margin. This appears to be mainly due to the impact of Delta-variant covid on consumer confidence, but also continued supply chain bottlenecks on the corporate sector. The Global Economic Surprise Index, i.e., the extent to which top-down global macro data beats or misses economists' expectations, has fallen in a straight line from a level of +90 in mid-June to -24 currently. It was last this low at the end of March 2020, at the beginning of the global impact of the pandemic, and before that in the second quarter of 2018, at the start of US-China tariff hikes and the imposition of non-tariff barriers to trade. So in short, there's been a sudden downward lurch relative to expectations for global macro in relation to the narrative from consensus of a continued strong recovery, broadening out by geography, and entering a virtuous circle of rising consumption and investment. Global equity markets have wobbled recently but are still trading close to their all-time highs set in early September. We think the key to understanding what happens next is to understand the relationship between Economic Surprise data and earnings revisions. We’ve found that changes in the Global Economic Surprise index tend to have a good leading relationship for how bottom-up analyst earnings revisions evolve three months later. And that, in turn drives market performance. And this matters because the covid recession and recovery have already witnessed exceptionally sharp movements, both in economic data - relative to consensus - and earnings estimate revisions. Indeed, they've been more extreme even than the volatility that we saw at the time of the Global Financial Crisis. So, at this level of -24 on economic surprise, our analysis suggests 12-month forward EPS expectations will likely decline by around 150bps over the next three months. That may not sound like much, but it compares with a current positive QoQ upward revision of 530bps and a peak QoQ revision of 1100bps in May of this year. Within our coverage, some markets have already gone through the transition adjustment to slower expected earnings revisions - most notably China, where we remain cautious. Our analysis finds that strong performance and strong revisions are positively correlated and vice versa for weak performance and poor revisions. Japan, Russia and South Africa are the standouts recently for positive revisions, and they may show some resilience to the deteriorating global situation. China, Indonesia, Malaysia and Thailand have had the worst revisions and generally poor performance; but China has also been underperforming due to investors assigning a lower valuation to the market due to this year's regulatory reset. Overall, we continue to prefer Japan to EM and China. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

29 Sep 20213min

Real interest rates are on the rise in Europe and the US and central banks are responding. This may impact currency markets headed into the fall. Matt Hornbach, Global Head of Macro Strategy, explains.-----Transcript -----Welcome to Thoughts on the Market. I'm Matt Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Tuesday, September 28th, at 12:30p.m. in New York. Just like clockwork, markets have become much more interesting and volatile after Labor Day in the U.S. Investors have been confronted with several issues that have collided in a big bang after what had been a relatively quiet summer. And central bank reactions have been a key part of the story going into the fall. To start, supply disruptions in commodity markets have led to inflation fears that have manifested themselves in higher market prices for inflation protection, mostly in Europe and the U.K. In response, the Bank of England has expressed more concern over the inflation outlook, since inflation is having a negative impact on the region's growth outlook. This combination of factors has caused real interest rates in Europe and the UK to remain extremely low and has also put downward pressure on the value of the British pound and the euro. Meanwhile, the U.S. economy has been more insulated from the commodity price shock, and inflation protection in the U.S. was already fully valued. In other words, worries about inflation in the U.S. began to build last year and, as a result, investors had already prepared themselves for the elevated inflation prints we're experiencing in the U.S. today. This means that real interest rates in the U.S. are left marching to the beat of other drummers. In particular, real interest rates in the U.S. have begun to respond to Federal Reserve monetary policy machinations. Last week, the Fed signaled that tapering its asset purchases could begin near term. That means the Fed will start purchasing less Treasury and agency mortgage-backed securities, leading to a decline in the amount of monetary accommodation the Fed has been providing. The question is, is this tapering akin to tightening policy? Participants on the Federal Open Market Committee would have you believe that tapering isn't the same thing as tightening policy. And technically they would be correct. When the Fed purchases assets in the open market such that its balance sheet grows, it is easing monetary policy. It's a different form of cutting interest rates. When the Fed's balance sheet no longer grows because it has stopped purchasing assets on a net basis, it is no longer easing monetary policy. In the transition between these two states, the Fed's balance sheet continues to grow, but at a slower rate than before. In this way, the process of tapering is akin to easing policy, but by less and less each month. But, and this is a big 'but', the process of tapering is the first step towards the process of tightening. Without the Fed tapering its asset purchases and slowing the growth of its balance sheet, rate hikes wouldn't appear on the radar screens of investors. So, the prospect of tapering this year has shown a spotlight on the prospect of rate hikes next year. And that has driven real interest rates higher in the U.S. So, what happens now? As long as real interest rates in the U.S. rise gradually, as they have done so far this year, the overall level of interest rates in the U.S., as you can see in the Treasury market, should also rise gradually. And if U.S. interest rates rise relative to those in Europe, which already began in August and we think will continue through the balance of the year, then the value of the U.S. dollar should appreciate relative to the euro. 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.

28 Sep 20213min

Our analyst’s equity positioning models have held up well and we continue to rely on an understanding of historical cycles as we move through this mid-cycle transition. Chief Investment Officer Mike Wilson explains.----- 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, September 27th, at 11:30a.m. in New York. So let's get after it. Our equity strategy process has several key components. Most importantly, we focus on the fundamentals of growth and valuation to determine whether the overall market is attractive and which sectors and stocks look the best. The rate of change on growth is more important than the absolute level, and we use a market-based equity risk premium framework that works well as long as you apply the correct regime when using it. In that regard, we're an avid student of market cycles and believe historical analogs can be helpful. For example, the mid-cycle transition narrative that has worked so well this year is derived directly from our study of historical, economic and market cycles. The final component we spend a lot of time studying is price. This is known as technical analysis. Markets aren't always efficient, but we believe they are often very good leading indicators for the fundamentals - the ultimate driver of value. This is especially true if one looks at the internal movements and relative strength of individual securities. In short, we find these internals to be much more helpful than simply looking at the major averages. This year, we think the process has lived up to its promise, with the price action lining up nicely with the fundamental backdrop. More specifically, the large cap quality leadership since March is signaling what we believe is about to happen - decelerating growth and tightening financial conditions. The question for investors at this point is whether the price action has fully discounted those outcomes already, or not. Speaking of price, equity markets sold off sharply last Monday on concerns about a large Chinese property developer bankruptcy. While our house view is that it likely won't lead to a major financial contagion like the Global Financial Crisis a decade ago, it will probably weigh on China growth for the next few quarters. This means that the growth deceleration we were already expecting could be a bit worse. The other reason equity markets were soft early last week had to do with concern about the Fed articulating its plan to taper asset purchases later this year, and perhaps even moving up the timing of rate hikes. On that score, the Fed did not disappoint, as they essentially told us to expect the taper to begin in December. The surprise was the speed in which they expect to be done tapering - by mid 2022. This is about a quarter sooner than the market had been anticipating and increases the odds for a rate hike in the second half of '22. After the Fed meeting on Wednesday, equity markets rallied as bonds sold off sharply. Real 10-year yields were up 11bps in two days and are now up 31bps in just eight weeks. That's a meaningful tightening of financial conditions and it should weigh on asset price valuations, including equities. It also has big implications for what should work at the sector and style level. In short, higher real rates should mean lower equity prices. Secondarily, it may also mean value over growth and small caps over Nasdaq, even as the overall equity market goes lower. This would mean a doubly difficult investment environment, given how most are positioned. For the past month, our strategy has been to favor a barbell of defensive quality sectors like healthcare and staples, with financials. The defensive stocks should hold up better as earnings revisions start to come under pressure from decelerating growth and higher costs, while financials can benefit from the higher interest rate environment. Last week, this barbell outperformed the broader index. On the other side of the ledger is consumer discretionary stocks, which remain vulnerable to a payback in demand from last year's over consumption. Within that bucket, we still favor services over goods where there remains some pent-up demand in our view. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

27 Sep 20213min