End-of-Year Encore: Space Investing

The current market pricing can tell investors a lot about what the market believes is coming next, but the future is uncertain and investors may not always agree with market expectations. Chief Cross-Asset Strategist Andrew Sheets explains.--- 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, August 5th, at 2 p.m. in London.Trying to predict where financial markets will go is difficult. The future, as they say, is uncertain, and even the most talented investors and forecasters will frequently struggle to get these predictions right.A different form of this question, however, might be easier. What do markets assume will happen? After all, these assumptions are the result of thousands of different actors, most of which are trying very hard to make accurate predictions about future market prices because a lot of money is on the line. Not only is there a lot of information in those assumptions, but understanding them are table stakes for a lot of investment strategy. After all, if our view only matches what is already expected by the market to happen, it is simply much less meaningful.Let's start with central banks, where current market pricing can tell us quite a bit. Markets expect the Fed to raise rates by another 100 basis points between now and February to about three and a half percent. And then from there, the Fed is expected to reverse course, reducing rates by about half a percent by the end of 2023. Meanwhile, the European Central Bank is expected to raise rates steadily from a current level of 0 to 1.1% over the next 12 months.Morgan Stanley's economists see it differently in both regions. In the U.S., we think the Fed will take rates a little higher than markets expect by year end and then leave them higher for longer than markets currently imply. In the U.S., we think the Fed will take rates higher than markets expect by year end and then leave them higher for longer than is currently implied. In Europe, it's the opposite. We think the ECB will raise rates more slowly than markets imply. The idea that the Fed may do more than expected while the ECB does less is one reason we forecast the US dollar to strengthen further against the euro.A rich set of future expectations also exists in the commodity market. For example, markets expect oil prices to be about 10% lower in 12 months time. Gasoline is priced to be about 15% lower between now and the end of the year. The price of gold, in contrast, is expected to be about 3% more expensive over the next 12 months.I’d stress that these predictions are not some sort of cheat code for the market. The fact that oil is priced to decline 10% doesn't mean that you can make 10% today by selling oil. Rather, it means that foreign investor, a 10% decline in oil, or a 3% rise in gold will simply mean you break even over the next 12 months.Again, all of this pricing informs our views. We forecast oil to decline less and gold to decline more than market prices imply. Meanwhile, Morgan Stanley equity analysts can work backwards looking at what these commodity expectations would mean for the companies that produce them. We won't get into that here, but it's yet another way that we can take advantage of information the market is already giving us.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.

6 Aug 20223min

As investors watch to see if tensions between the U.S. and China will escalate, it’s important to understand the underlying competitive dynamic and how U.S. policy may have macro impacts.--- Transcript ---Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public pPolicy 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 U.S. public policy and financial markets. It's Thursday, August 4th, at 1 p.m. in New York.This week, Speaker of the House Nancy Pelosi's Asia trip had the attention of many investors as they watched to see whether her actions would escalate tensions between the U.S. and China. In our view, though, this event wasn't a potential catalyst for tensions, but rather evidence of tensions that persist between the two global powers. Hence, we think investors are better served focusing on the underlying dynamic rather than any particular event.The U.S.-China rivalry has many complicated causes, many of which we've covered on previous podcasts. But the point we want to reemphasize is this; this rivalry is going to persist. China is interested in asserting its global influence, which in ways can be at odds with how the U.S. and Europe want the international economic system to function. Nowhere is this clearer than in the policies the U.S. has adopted in recent years aimed at boosting its competitiveness with China.The latest is the enactment of the Chips Plus Bill, which allocates over $250 billion to help US industries, in particular the semiconductor industry, to devolve its supply chain reliance on China for the purposes of economic security and to protect sensitive technologies. Policies like this have more of a sectoral effect than the macro one. But the primary market impact here being a defraying of rising costs for the semiconductor industry. But investors should be aware that there's potential policy changes on the horizon that could have macro impacts. For example, Congress considered creating an outbound investment restriction mechanism in that Chips Plus bill. Such a restriction could have significantly interrupted foreign direct investment in China with substantial consequences for China equity markets.That provision didn't make it into this bill, and with little legislative time between now and the midterm elections, it's unlikely to resurface this year. That's cause some to conclude that it's likely to be years before such a provision could become enacted, particularly if Republicans take back control of one or both chambers of Congress creating a risk of gridlock.But we'd caution that's too simple of a conclusion. The concept of outbound investment restrictions enjoys bipartisan support. So we think investors should be on guard for this provision to get serious consideration in 2023. We'll, of course, track it and keep you informed.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.

4 Aug 20222min

After the July FOMC meeting, markets took a quick dive and then made an immediate recovery, so what happened?-----Transcript-----Welcome to Thoughts on the Market. I'm Matthew 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 Wednesday, August 3rd, at 1 p.m. in New York. In the weeks since the July meeting of the Federal Open Market Committee, or FOMC, rates and currency markets have made quite the round trip. Treasury yields from 2 out to10 year maturities fell by over 25 basis points in the three days that followed the meeting. And the U.S. dollar index declined by 2% over the same period. However, looking at these markets today, as I sit here recording this podcast, it's almost as if the July FOMC meeting didn't happen. 10 year Treasury yields are about where they were going into the meeting last week, and 2 year yields are a bit higher even. As for the U.S. dollar index, it's back to the range it was in ahead of the meeting. So what happened? Going into the meeting, investors thought that the Fed would deliver a 75 basis point rate hike, but recognized that there was a tail risk of a larger 100 basis point hike. And even if the tail risk didn't materialize, investors had acknowledged that the additional 25 basis points might be delivered in September instead. And that would make for the third 75 basis point hike in this cycle. In short, investors were positioned for a hawkish outcome. The FOMC statement and Chair Powell's prepared remarks didn't disappoint. The message was on par with what FOMC participants had been saying over recent weeks and months. Inflation is still top of mind, and more work is needed to bring it down to acceptable levels. If the meeting ended with Powell's prepared remarks, rates and currencies would have likely taken a different path to where they trade today. However, the meeting didn't end there, and the Q&A session of Powell's press conference struck a more dovish tone. Three messages contributed to this interpretation. First, Powell suggested that rates had achieved a neutral setting, or one that neither puts upward nor downward pressure on economic activity relative to its potential. Second, he said that because a neutral policy setting had been reached, the pace of subsequent rate hikes could soon begin to slow. And finally, he suggested that the committee's view of the peak policy rate in the cycle hadn't changed since the last FOMC meeting, even though inflation data since then continued to surprise on the higher side. The reason for this seemed to be focused on the deterioration in activity data or growth data. In many ways, investors should have expected these statements from Powell, given guidance coming from the June summary of economic projections. In addition, because Fed policy had tightened financial conditions this year, and those financial conditions helped slow economic growth, the case for a less hawkish performance might have been predictable. The data that arrived in the wake of the meeting underscored the recent themes of slower growth and higher inflation. But the Fedspeak that arrived in the wake of the data, well, it continued to focus on inflation, as it had done before the Fed met in July. Where does all of that leave the Fed on policy and us on markets? Well, the Fed's job bringing inflation down hasn't yet been accomplished, the bond market is pricing less policy tightening than the Fed is last guided towards, and downside risks to global growth are rising. As a result, we remain neutral on bond market duration, but remain bullish on the U.S. dollar, particularly against the euro. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people find the show.

3 Aug 20223min

As studies begin to show that obesity medications may save lives, will governments and insurances begin to consider them preventative primary care? And how might this create opportunity in pharmaceuticals? Head of European Pharmaceuticals Mark Purcell and Head of U.S. Pharmaceuticals Terence Flynn discuss.-----Transcript-----Mark Purcell: Welcome to Thoughts on the Market. I'm Mark Purcell, Head of Morgan Stanley's European Pharmaceuticals Team. Terence Flynn: And I'm Terence Flynn, Head of the U.S. Pharmaceuticals Team. Mark Purcell: And on this special episode of Thoughts on the Market, we'll be talking about the global obesity challenge and our outlook for the next decade. It's Tuesday, August the 2nd, and it's 1 p.m. in London. Terence Flynn: And 8 a.m. in New York. Terence Flynn: So Mark, more than 650 million people worldwide are living with obesity as we speak. The personal, social and economic costs from obesity are huge. The World Health Organization estimates that obesity is responsible for 5% of all global deaths, which impacts global GDP by around 3%. Obesity is linked to over 200 health complications from osteoarthritis, to kidney disease, to early loss of vision. So tackling the obesity epidemic would impact directly or indirectly multiple sectors of the economy. Lots to talk about today, but let's start with one of the key questions here: why are we talking about all this now? Are we at an inflection point? And is the obesity narrative changing? Mark Purcell: Yeah Terence look, there's a category of medicine called GLP-1's which have been used to treat diabetes for over a decade. GLP-1 is an appetite suppressing hormone. It works on GLP-1 receptors, you could think of these as hunger receptors, and it helps to regulate how much food our bodies feel they need to consume. Therefore, these GLP-1 medicines could become an important weapon in the fight against obesity. The latest GLP-1 medicines can help individuals who are obese lose 15 to 20% of their body weight. That is equivalent to 45 to 60% of the excess weight these individuals carry in the form of fat which accumulates around the waist and important organs in our bodies such as the liver. There is a landmark obesity study called SELECT, which has been designed to answer the following key question: does weight management save lives? An interim analysis of this SELECT study is anticipated in the next two months, and our work suggests that GLP-1 medicines could deliver a 27% reduction in the risk of heart attacks, strokes and cardiovascular deaths. We believe that governments and insurance companies will broaden the reimbursement of GLP-1 medicines in obesity if they are proven to save lives. This comes at a time when new GLP-1 medicines are becoming available with increasing levels of effectiveness. It's an exciting time in the war against obesity, and we wanted to understand the implications of the SELECT study before it reads out. Terence Flynn: So, our collaborative work suggests that obesity may be the new hypertension. What exactly do we mean by that, Mark? How do we size the global opportunity and what's the timeline here? Mark Purcell: Back in the 1960s and 1970s, hypertension was seen as a lifestyle disease caused by stress and old age. Over time, it was shown that high blood pressure could be treated, and in doing so, doctors could prevent heart attacks and save lives. A new wave of medicines were introduced to the market in the mid 1980s to treat individuals with high blood pressure and doctors found the most effective way to treat high blood pressure was to use combinations of these medicines. By the end of the 1990's, the hypertension market reached $30 billion in sales, that's equivalent to over $15 billion today adjusting for inflation. Obesity is seen by many as a lifestyle disease caused by a lack of self-control when it comes to eating too much. However, obesity is now classified as a preventable chronic disease by medical associations, just like hypertension. Specialists in the obesity field now recognize that our bodies have evolved over hundreds of thousands of years to put on weight, to survive times where there is a lack of food available and a key way to fight obesity is to reset the balance of how much food our bodies think they need. With the availability of new, effective obesity medicines, we believe that obesity is on the cusp of moving into mainstream primary care management. And the obesity market is where the treatment of high blood pressure was in the mid to late 1980s. We built a detailed obesity model focusing on the key bottlenecks, patient activation, physicians engagement and payer recognition. And we believe that the obesity global sales could exceed $50 billion by the end of this decade. Terence Flynn: So Mark, what are the catalysts aligning to unlock the potential of this $50 billion obesity opportunity? Mark Purcell: We believe there are full catalysts which should begin to unlock this opportunity over the next six months. Firstly, the SELECT study, which we talked about. It could be stopped early in the next two months if GOP P1 medicines are shown overwhelmingly to save lives by reducing excess weight. Secondly, the demand for GLP-1 medicines to treat obesity was underappreciated by the pharmaceutical industry. But through the second half of this year, GLP-1 medicines, supply constraints will be addressed and we'll be able to appreciate the underlying patient demand for these important medicines. Thirdly, analysis shows that social media is already creating a recursive cycle of education, word of mouth and heightened demand for these weight loss medicines. Lastly, diabetes treatment guidelines are actively evolving to recognize important comorbidities, and we expect a greater emphasis on weight treatment goals by the end of this year. Terence Flynn: Mark, you mentioned some bottlenecks with respect to the obesity challenge. One of those was patient activation. What's the story there and how does social media play into it? Mark Purcell: Yes, great question Terence, look it's estimated that less than 10% of individuals suffering from obesity are diagnosed and actively managed by doctors. And that compares to 80 to 90% of individuals who suffer from high blood pressure, or diabetes, or high levels of cholesterol. Once patients come forward to see their doctors, 40% of them are treated with an anti-obesity medicine. And as more effective medicines become available, we just think this percentage is going to rise. Lastly, studies designed to answer the question, what benefit does 15 to 20% weight loss deliver in terms of reducing the risk of high blood pressure, diabetes, kidney disease and cardiovascular disease? Will help activate governments and insurance companies to reimburse obesity medicines. But it all starts with individuals suffering from obesity coming forward and seeking help, and this is where we expect social media to play a really important key role. Terence Flynn: To a layperson, there's significant overlap between diabetes and obesity. How do we conceptualize the obesity challenge vis a vis diabetes, Mark? Mark Purcell: Terence, you're absolutely right. There is significant overlap between diabetes and obesity and it makes it difficult and complicated to model. It's estimated that between 80 to 85% of diabetics are overweight. It's estimated that 35% of diabetics are obese and around 10% of diabetics are severely obese. GLP-1 medicines have been used to treat diabetes for over a decade, not only being extremely effective in lowering blood sugar, but also in reducing the risk of cardiovascular events like heart attacks and removing excess body weight, which is being recognized as increasingly important. This triple whammy of benefit means that the use of GLP-1 medicines is increasing rapidly, and sales in diabetes are expected to reach over $20 billion this year, compared to just over $2 billion in obesity. By the end of the decade our work suggests that the use of GLP-1 based medicines in obesity could exceed the use in diabetes by up to 50%. Terence Flynn: Mark, thanks for taking the time to talk. Mark Purcell: Great speaking with you again, Terrence. Terence Flynn: 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.

3 Aug 20227min

As the Fed continues to surprise with large and fast interest rate increases, the market must decide, has the Fed done enough? Or is the recession already here?-----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, August 1st at 11 a.m. in New York. So let's get after it. Over the past year, the Fed has come under scrutiny for their outlook on inflation, and they've even admitted themselves that they misjudged the call when they claimed inflation would be transient. In an effort to regain its credibility, the Fed has swiftly pivoted to its most hawkish policy action since the 1980s. In fact, while we may have been the most hawkish equity strategists on the street at the beginning of the year, we never expected to see this many rate hikes in 2022. Suffice it to say, it hasn't gone unnoticed by markets with both stocks and bonds off to their worst start in many decades. However, since peaking in June, 10 year Treasuries have had one of their largest rallies in history, with the yield curve inverting by as much as 33 basis points. Perhaps more importantly, market based five year inflation expectations have plunged and now sit very close to the Fed's long term target of 2%. Objectively speaking, it appears as though the bond market has quickly turned into a believer that the Fed will get inflation under control. This kind of action from the Fed is bullish for bonds, and one of the main reasons we turned bullish on bonds relative to stocks back in April. Since then, bonds have done better than stocks, even though it's been a flat ride in absolute terms. It also explains why defensively oriented stocks have dominated the leadership board and why we are sticking with it. Meanwhile, stocks have rallied with bonds and are up almost 14% from the June lows. The interpretation here is that the Fed has inflation tamed, and could soon pause its rate hikes, which is usually a good sign for stocks. However, in this particular cycle, we think the time between the last rate hike and the recession will be shorter, and perhaps after the recession starts. In technical terms, a recession has already begun with last week's second quarter GDP release. However, we don't think a true recession can be declared unless the unemployment rate rises by at least a few percentage points. Given the deterioration in profit margins and forward earnings estimates, we think that risk has risen considerably as we are seeing many hiring freezes and even layoffs in certain parts of the economy. This has been most acute in industries affected by higher costs and interest rates and where there's payback in demand from the binge in consumption during the lockdowns. In our conversations with clients over the past few weeks, we've been surprised at how many think a recession was fully priced in June. While talk of recession was rampant during that sell off, and valuations reached our target price earnings ratio of 15.4x, we do not think it properly discounted the earnings damage that will entail if we are actually in a recession right now. As we have noted in that outcome, the earnings revisions which have begun this quarter are likely far from finished in both time or level. Our estimate for S&P 500 earnings going forward in a recession scenario is $195, which is likely to be reached by the first quarter of 2023. Of course, we could still avoid a recession defined as a negative labor cycle, or it might come later next year, which means the Fed pause can happen prior to the arrival of a recession allowing for that bullish window to expand. We remain open minded to any outcome, but our analysis suggests betting on the latter two outcomes is a risky one, especially after the recent rally. The bottom line, last month's rally in stocks was powerful and has investors excited that the bear market is over and looking forward to better times. However, we think it's premature to sound the all-clear with recession and therefore earnings risk is still elevated. For these reasons, we stayed defensively oriented in our equity positioning for now and remain patient with any incremental allocations to stocks. 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.

1 Aug 20224min

One of the most common standards for investment diversification, the 60:40 portfolio, has faced challenges this year with significant losses and shifting correlations between stocks and bonds. Is this the end of 60:40 allocation?---- 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, July 29th, at 2 p.m. in London.The so-called 60:40 portfolio is one of the most common forms of diversified investing, based on the idea of holding a portfolio of 60% equities and 40% high-quality bonds. In theory, the equities provide higher returns over time, while the high-quality bonds provide ballast and diversification, delivering a balanced overall portfolio. But recently, we and many others have been talking about how our estimates suggested historically low returns for this 60:40 type of approach. And frequently these estimates just didn't seem to matter. Global stocks and bonds continued to hum away nicely, delivering unusually strong returns and diversification.And then, all at once, those dour, long term return estimates appeared to come true. From January 1st through June 30th of this year, a 60:40 portfolio of U.S. equities and the aggregate bond index lost about 16% of its value, wiping out all of the portfolio's gains since September of 2020. Portfolios in Europe were a similar story. These moves raise a question: do these large losses, and the fact that they involved stock and bond prices moving in the same direction, mean that diversified portfolios of stocks and bonds are fundamentally broken in an era of tighter policy?Now, one way that 60:40 portfolios could be broken, so to speak, is that they simply can't generate reasonable returns going forward. But on our estimates, this isn't the case. Lower prices for stocks and higher yields on bonds have raised our estimate for what this type of diversified portfolio can return. Leaving those estimates now near the 20-year average.A bigger concern for investors, however, is diversification. The drawdown of 60:40 portfolios this year wasn't necessarily extreme for its magnitude—2002 and 2008 saw larger losses—but rather its uniformity, as both stocks and bonds saw unusually large declines.These fears of less diversification have been given a face, the bond equity correlation. And the story investors are afraid of goes something like this. For most of the last 20 years, bond and equity returns were negatively correlated, moving in opposite directions and diversifying each other. But since 2020, the large interventions of monetary policy into the market have caused this correlation to be positive. Stock and bond prices are now moving in the same direction. The case for diversification is over.This is a tempting story, and it is true that large central bank actions since 2020 have caused stocks and bonds to move together more frequently. But I think there's also a risk of confusing direction and magnitude. Bonds can still be good portfolio diversifiers, even if they aren't quite as good as they've been before.Even if stocks and bonds are now positively correlated, that correlation is still well below 1 to 1. That means there are still plenty of days where they don't move together, and this can matter significantly for how a portfolio behaves, and how diversification is delivered, over time.Another important case for 60:40 style diversification is volatility. Even after one of the worst declines for bond prices in the last 40 years, the trailing one-year volatility of the US aggregate bond index is about 6%. That is one third the volatility of U.S. stocks over the same period. Having 40% of a portfolio in something with one third of the volatility should dampen overall fluctuations. For all these reasons, we think the case for a 60:40 style approach to diversified investing remains.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.

29 Juli 20224min

Yesterday, the U.S. Federal Reserve raised interest rates by another 75 basis points. What is driving these above average rate hikes and what might the effect on markets be?-----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 Thursday, July 28th at 4 p.m. in London. Yesterday, the Federal Reserve raised rates by 75 basis points, and the Nasdaq market index had its best day since April of 2020, rising over 4%. It was a day of big moves, but also some large unanswered questions. A 75 basis point rise in Fed funds is large and unusual. In the last 30 years, the Fed has only raised rates by such a large increment three times. Two of those instances were at the last two Federal Reserve meetings, including the one we had yesterday. These large moves are happening because the Fed is racing to catch up with, and get ahead of, inflation, which is currently running at about 9% in the U.S. In theory, higher fed rate should slow the economy and cool inflationary pressure. But that theory also assumes that higher rates work with a lag, perhaps as long as 12 months. There are a couple of reasons for this, but one is that in theory, higher rates work by making it more attractive to save money rather than spend it today. Well, I checked my savings account today and let's just say the rate increases we've had recently haven't exactly shown up. So the incentives to save are still working their way through the system. This is part of the Fed's predicament. In hockey terms, they're trying to skate the proverbial puck, aiming policy to where inflation and the economy might be in 12 months time. But both inflation and their policy changes are moving very fast. This is not an easy thing to calibrate. Given that difficulty, why did the markets celebrate yesterday with both stock and bond prices rising? Well, the Fed was vague about future rate increases, raising market hopes that the central bank is closer to finishing these rate rises and may soon slow down, or pause, its policy tightening as growth and inflation slow. After all, long term inflation expectations have fallen sharply since the start of May, perhaps suggesting that the Fed has done enough. And as my colleague Michael Wilson, Morgan Stanley's chief investment officer and chief U.S. equity strategist, noted on Monday's podcast, markets have often seen some respite when the Fed pauses as part of a hiking cycle. But it's also important to stress that the idea that the Fed is now nearly done with its actions seems optimistic. The last two inflation readings were the highest U.S. inflation readings in 40 years, and Morgan Stanley's economists expect core inflation, which is an important measure excluding things like food and energy, to rise yet again in August. In short, the Fed's vagueness of future increases could suggest an all important shift. But it could also suggest genuine uncertainty on growth, inflation and how quickly the Fed's actions will feed through into the economy. The Fed has produced some welcome summer respite, but incoming data is still going to matter, significantly, for what policy looks like at their next meeting in September. 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.

28 Juli 20223min

While midterm polls have shown a preference for republican candidates, this lead is narrowing as the election grows closer, and the full ramifications of this ever evolving race remain to be seen.-----Transcript-----Welcome the 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 U.S. public policy and financial markets. It's Wednesday, July 27th, at 1 p.m. in New York. We're still months away from the midterm elections, and polls still show strong prospects for Republicans to win back control of Congress. As we previously discussed, such an outcome could result in stalling key policy variables for markets such, as tax changes and regulations for tech and cryptocurrency. But remember not to assume that such an outcome is a sure thing. Take, for example, recent polls showing voters' preference for Republican congressional candidates over Democrats actually narrowing. A month ago, the average polling lead for Republicans was nearly 3%, it's now closer to 0.5%. Some independent forecasting models even now show the Democrats as a slight favorite to hold the Senate, even as they assess Democrats are unlikely to keep control of the House. The reasons for Democrats' improvement in the polls are up for debate, but that's not the point for investors. In our view, the point is that the race is still evolving and that can have market ramifications. Even if Democrats don't ultimately keep control of Congress, making it a closer race means markets may have to account for a higher probability that certain policies get enacted. Take corporate tax hikes, for example. Recent news suggests they're off the table, but if Democrats hold Congress, it's likely they'd be revisited as a means of funding several of their preferred initiatives. That could pressure a U.S. equity market already wary of margin pressures from inflation and slowing growth. A more constructive example is the clean tech sector. Again, reports are that the plan to allocate money to clean energy is off the table, but this could be revisited if Democrats keep control. Hence, improved Democratic prospects could benefit the sector ahead of the election. The bottom line is that the midterm elections are still a market factor over the next few months. We'll keep you in the loop right here about how it all plays out. 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.

27 Juli 20222min