Morgan Stanley’s CIO and Chief US Equity Strategist Mike Wilson comments.
His "Bottom line":
- markets are likely to remain vulnerable in the near term until we get better growth data or more comfort from Fed on policy support, neither of which we think is forthcoming soon
- support can also come from cheap valuations, but we don’t have that yet at current prices
- S&P 500 is still trading 20x forward 12-month earnings estimates. Our fair value multiple assuming a soft-landing outcome on the economy is closer to 19x, which means things aren’t actually cheap until we reach 17-18x, which is more than 10 per cent away from where we are trading
If you want more:
- topping process began in April with the first meaningful sell off since last October’s lows.
- Even as many stocks and indices rallied back to new highs this summer, the leadership took on a more defensive posture with sectors like Utilities, Staples and even Real Estate doing better than they have in years.
- this shift in leadership has coincided with softer economic data during the second quarter. This softness has continued into the summer with the all-important labor market data joining in as already noted. This rotation was an early warning sign that stocks were likely vulnerable to a correction as we highlighted in early July.
- the third quarter is when such corrections tend to happen seasonally
- valuations reached very rich levels this year ... this is the main reason we have no upside to our US major averages over the next year even assuming our economists’ soft landing base case outcome for the economy.
- deterioration in the growth data, and a Fed that is in no rush to cut rates proactively
- the Fed tends to follow 2-year yields and over the last month 2-year treasury yields have fallen by 100 basis points and is almost 170 basis points below the Fed Funds rate. What this means is that the market is telling the Fed they are way too tight and they need to cut much more aggressively than what they have guided. The dilemma for the Fed is that the next meeting is six weeks away and that’s a lifetime when markets are trading like they are today. Markets tend to be impatient and so I expect they will continue to trade with high volatility until the Fed appeases the market’s wishes. The flip side, of course, is that the Fed does an intra meeting rate cut; but that may make the markets even more nervous about growth in my view.
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Update:
NQ opening for evening trade and running higher so far. The night is but young though!
