Morgan Stanley Wealth Management investment chief Lisa Shalett issued a research note and spoke in an interview this week with CNBC.
Warned that:
- Problematically, equity and credit markets are aggressively fighting the Fed, with valuations only supported by assumptions of ample rate cuts
- History suggests these strategies often end in disappointment as cause and effect are conflated
Shallet subscribes to "Don't fight the Fed". And also adds reasons to be wary:
1. Very uncertain economic outlook:
- Some investors expect the economic recovery in China to rescue the US. economy from steeper decline, but if US growth rebounds, that could put upward pressure back on prices and prompt the Fed to keep rates higher for longer, in turn weighing on asset prices.
2. Profits are susceptible:
- For the past 10 quarters, US nominal GDP has run between 9% and 14%, versus the long-run trend of 4-5%, and S&P 500 operating margins have averaged 14.5-16.5%, versus the 25-year average of 12.5%. The tendency for performance to revert to a long-term average could bring about a negative year-over-year change in earnings growth, known as a ‘profits recession’.
3. Strong jobs market
- “A resilient jobs market could help the economy achieve a ‘soft landing’ if robust real wages support consumption. The conundrum, however, is that strong wages and spending would likely add to inflationary pressures and thus provide little rationale or incentive for the Fed to cut rates.”
