Thoughts on the Market

The US economy is in a unique moment of uncertainty but headed into 2022, shifts in inflation, the labor market and Fed policy tell a constructive story.----- Transcript -----Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research.Robert Rosener And I'm Robert Rosener, Senior U.S. Economist.Ellen Zentner And on this episode of the podcast, we'll be talking about the 2022 outlook for the U.S. economy. It's Thursday, December 9th at noon in New York.Robert Rosener So, Ellen, we're headed into 2022. We're in a pretty unique moment for the U.S. economy. We see rising inflation, supply chain issues and uncertainty about Fed policy. Of course, we also had disappointing job growth in the month of November, but unemployment that is now not far from pre-COVID lows. So we've got a lot of different indicators sending very different messages right now. How should listeners be thinking about the U.S. economy right now and what that means for the outlook into 2022?Ellen Zentner Yeah. So we're pretty constructive on the U.S. economy, and it may be surprising with all the uncertainties that you noted. You know, consumers are in very good shape. We've been talking about excess savings for a long time on these podcasts. Excess savings is still there as a cushion. Look, inflation is rising and continues to rise, but it's rising because demand is still strong. At the same time, we don't have enough goods of what people want to buy. So I don't think we're out of the woods yet for rising inflation. I think we're going to get some more prints here that are even higher. But we already are getting indications from our equity analysts that their companies are saying that their supply chains are easing. So I think, within just a matter of months, we should start to see inflation come down. And while households are telling us in our surveys that inflation worries them even more so than COVID, they're still spending. And we expect that as we move into next year, we're going to recoup some of that deferred demand from goods that are going to be available that weren't there before.Ellen Zentner But the other thing that's really important for consumer spending is the jobs numbers, and you mentioned that, Robert, explained to people-- because this was the number one question we got after that jobs report: how is it that you get a headline number? That's so disappointing, but unemployment rate is that low? I mean, is it good? Is it bad?Robert Rosener Yeah, it's a really mixed picture and a lot of different indicators pointing in a lot of different directions. So of course, we got our latest read on the labor market that showed a slower than anticipated rise in jobs. In the month of November, we created 210,000 jobs. That was less than half of what was expected, but overall, the report still had a solid tone. And one of the reasons why there are still solid indications coming from the labor market is that we're seeing continued healing from some of the biggest effects of the pandemic and that came through, most notably in November in labor force participation. One of the biggest shortfalls in the labor market has been the number of individuals who are actually actively participating in the labor force. We saw the labor force participation rate, in total, rise 20 basis points in November to 61.8%. That's still well below the 63.4% peak we saw pre-COVID, but it's notably out of the very sticky range it's been in since the summer. So we're seeing continued healing there. We're expecting that healing is going to continue, and that's going to be a very important part of this labor market recovery.Ellen Zentner So what are you telling clients then that are worried about wage pressures and where those might go? Because participation, rising participation, does matter there. So what's our message?Robert Rosener Well, much like the inflation backdrop, we're moving through a period of more elevated wage growth. There's been a significant amount of disruption in the labor market and alongside it, wage pressures have risen. But labor supply opening back up is a very important way that we're going to see supply and demand come back into balance in the labor market. We just got data on job openings, which showed that aggregate job openings in the economy are in excess of 11 million. There's one and a half open jobs for every unemployed individual in the labor market. If we boost the number of people who are actively participating in the labor market, it's going to bring those supply and demand metrics in better balance, and it should help to ease wage pressures alongside that.Ellen Zentner OK, that's interesting because, you know, one conversation that we have with our equity investors quite a bit is, you know, how should companies be looking at higher wage pressures? And of course, if you talk to economists and academics, right, we love to see higher nominal wages because that means stronger backdrop for aggregate demand. But the other reason why I really like higher nominal wages, they precede capital deepening. So if companies want to offset a higher wage bill, then you've got to find efficiencies and to find efficiencies, you've got to invest. So we're seeing companies invest in IT and equipment. We are calling it 'the global COVID capex cycle.' And that's really a bright spot in the economy for next year's outlook as well. So we would expect that to continue.Robert Rosener So, Ellen, we talked about a lot there. We've got elevated inflation now, some of which may be passing as supply chain disruptions ease. We have labor markets that, on the one hand, look tight, on the other hand, look like they have scope for further recovery. What does this mean for Fed policymakers and how do they put together the puzzle of what's going on in the economy when they're thinking about normalizing monetary policy?Ellen Zentner Yeah, it's not an easy job, is it? But Chair Powell is going to continue that job, as we've learned, and it's not going to be an easy backdrop for him. The Fed is concerned about what looks like more persistent inflationary pressures than they had previously thought. So no doubt, you know, you and I can sit down and pick apart the data and easily point to areas of inflation that are clearly temporary. But we've just not seen evidence of it as early as expected. And markets are starting to pressure the Fed on really giving more weight to price stability. And so we have seen a shift from the Fed. Last week, we heard Chair Powell say that price stability is important and only price stability would then beget maximum employment. And so really putting a lot more pressure on the price stability side of things. So we think at this upcoming FOMC meeting next week that we're going to see quite a hawkish shift from the Fed, both in their message around how quickly they are reducing the pace of their purchases. We think that they'll end that early. And then we'll see their so-called dot plot show an indication that they're going to start rate hikes earlier than expected, probably two quarters earlier than expected. And so I think that's a really important shift. And what it means is that going forward, our forecast that inflation will eventually start slowing in the first quarter will be very important in determining when the Fed actually does start increasing rate hikes.Ellen Zentner So that was a lot to unpack about the outlook. There's many more details, and we'll pick out interesting parts for folks as we go along. A new podcast to come. And Robert. Thanks for taking the time to talk.Robert Rosener Great speaking with you, as always, Ellen.Ellen Zentner As a reminder, 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.

Headed into next year, ‘Build Back Better’ legislation remains a work in progress, but Congress may find common ground in both parties’ concerns around one issue: tech regulation.----- 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 Thursday, December 9th at 10:00 a.m. in New York. Congress continued to check things off its year end to do list this week, following up its funding deal to avoid a shutdown with an agreement to raise the debt ceiling. The Build Back Better plan, which features new spending on environmental and social issues backed by new taxes, remains a work in progress. So, this week we want to look ahead a little to an issue which could feature heavily in congressional debate next year: regulation of the tech industry. Now, to be clear, we think the prospects for congressional action ahead of the midterms are quite low. But major legislation that drives sea changes in policy often is a multi-year process and you can learn a lot by paying attention to that process. Republicans spent a decade crafting the tax reform that would drive their actions in 2018. The same for Democrats with the years preceding the Affordable Care Act and the Dodd-Frank reforms of the banking industry. And this coming year could be a particularly educational one in terms of how DC wants to tackle the tech industry. That's because the industry could continue to be a popular issue for both Republicans and Democrats. Both parties share concerns about content moderation, data privacy and company size, though they differ on the approach to dealing with these issues. Crucially, they also share a political motivation, with a recent poll showing the tech industry's approval rating with the American public at 11%, one of the few institutions with a lower approval rating than Congress. So what do we think we'll learn as Congress focuses on this issue? Policymakers are likely to update existing templates for regulating traditional broadcast media. That's because there are already institutions in place to do this, and it's easier for voters to understand the process. A bear case for what this could look like comes from overseas. The United Kingdom's Online Safety Bill and the European Union's Digital Markets Act spell out some big and potentially costly regulatory challenges for social media companies. This includes requirements to allow users to easily move their data, disallowing product tie-ins and preferential product placement, and potentially, legal and financial liability for harmful content. If such measures were adopted in the US, our colleague and coauthor Brian Nowak estimates this could meaningfully crimp social media companies’ ad revenue, leading to underperformance of the sector. But for now, we expect next year will reveal the U.S. is likely headed in a more moderate direction. Early legislative proposals tend to gravitate toward codifying data transparency, portability rights and content moderation. Here, our colleague Brian Nowak notes that internet companies have already begun investing heavily to develop internal infrastructure that deals with these types of regulations, potentially limiting the cost impact of new laws. That's a key reason he still sees value in this stock sector. But of course, that also means if we've read the policy direction in the US incorrectly, there's downside for the sector. So, we'll be watching carefully in 2022 to see if the U.S. continues to forge its own path or follows Europe in its approach to tech regulation. 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.

With early data in on the Omicron variant, biotechnology analyst Matthew Harrison takes us through where we stand on vaccine efficacy headed into the winter.----- 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 updates on the Omicron variant and vaccine efficacy. It's Wednesday, December 8th at 4:00 p.m. in London. Matthew Harrison And it's 11:00 a.m. in New York. Andrew Sheets So, Matt, it's great to talk to you again. We've had a lot of small pieces of data come out recently on the Omicron variant and its ability or not to evade vaccines. What's the latest and what do we know? Matthew Harrison So, we've had three studies published so far. I would caution that the samples are small, and we have to take them as that, but we do have some interesting trends developing. So, the first one is: most of the data has demonstrated a substantial drop in what are called 'neutralizing titers' against two doses of the vaccine. And so that unfortunately means that protection against symptomatic infection for people that have had two doses of the vaccine is quite limited. We don't know exactly what, but it's definitely below or at 50%. What we've also learned is that a third dose can help restore some of that protection. We don't know the durability of that dose and we don't know how much protection it restores, but it does restore some protection. I think importantly, though, one of the things to remember is that most of the globe has only had two doses. And as we run through this potential spread of Omicron over the next few months, most of the globe will continue to only have two doses. So that data on two doses does suggest that there can be substantial reinfection risk for those that have had the vaccine. Andrew Sheets So Matthew, you know, when we're thinking about these numbers and we think about vaccine efficacy, maybe dropping to 50%, what does that mean in terms of the risks versus current variants and then the risks if you're not vaccinated at all? Matthew Harrison Right. So, I think there are two important things that I would say. So, the first is, what we're talking about here is symptomatic infection. Some of the other data that's come out has been on T cells. T cells are the second component of your immune system. They help kill virus once it's already infected in cells, and the T cell data looks like there remains substantial protection driven by T cells. And so, I think what that says is even though we're seeing substantial drops in protection against symptomatic infection, my hope continues to be based on these data and other data we've looked at, that protection against severe outcomes such as hospitalization and death could remain quite high. Andrew Sheets So that seems quite important for both the public health outcomes. And then, as would follow the impact in the economy, is that it might be more likely that somebody with two shots of a vaccination regime would get some form of COVID, would show symptoms, but it might be still much less likely that they would end up in the hospital with severe cases, as the vaccines would still help the body protect against those more extreme outcomes. Matthew Harrison That is my hope and based on the data that we're seeing so far, I would note, as we talked about at the beginning, that all of these studies that we're seeing come out right now are preliminary. You know, my hope is over the course of the next week or so, we're going to have a lot broader data set available to answer many of the questions we're talking about. And so, we're still going to have to, take our time with this because we don't have complete information yet. Matthew Harrison So, Andrew, one of the questions I've been thinking about here is, and you touched on it in some of the questions you were asking me, is how does the market handle a substantial increase in the number of infections, but maybe a lower proportion of those infections ending up with severe disease than we've seen in previous waves? Andrew Sheets Yeah, thanks Matthew. So look, I think this distinction between, you know, any case of COVID that shows symptoms and a case of COVID that results in somebody being hospitalized, you know, that is a pretty big distinction. And again, it's quite possible to see headlines and get quite worried about headlines that you know this variant evades vaccines and kind of to think that, "oh, then vaccines are powerless to stop it" when you know, I think as your research has rightly highlighted, if the vaccines can still provide a powerful mitigant against the most severe cases against hospitalizations, and you can still avoid some of the most severe public health outcomes that really would force much bigger restrictions. And those are the types of things that would really slow economic activity and really disrupt the economy, in addition to obviously having a really tragic impact on human life. So I think that distinction is important. Andrew Sheets We obviously, as you mentioned, it's early and we need to watch it in terms of just more cases, you know, evolving again, I think we have to see how public health officials react to that. How do consumers react to it? Does it impact consumer behavior around the holidays? And you know, we do think U.S. economic activity and European economic activity are pretty strong at the moment, so they have some cushion. But obviously it needs to be monitored. Andrew Sheets I think the other economy we need to watch is China, which is operating with a zero COVID policy. So, a quite restrictive policy trying to prevent any COVID cases. You know, if the indications are that we are dealing with now two more contagious variants: the Delta variant, and the Omicron variant, you know, there's a question of, does that complicate any sort of zero COVID strategy when you are dealing with a more contagious virus? And that's another big economic story that we have to keep our eye on. Matthew Harrison Andrew, that's great. Thanks for taking the time to chat today. Andrew Sheets Matt, always great to talk to you. 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.

Investors brace for heightened volatility in European equities as they navigate renewed COVID-19 concerns and shifts in US monetary policy. Amid this turmoil, promising opportunities arise in value stocks, particularly in sectors like autos, banks, and energy. The analysis reveals that many European companies are attractively valued, making this a potentially lucrative entry point for savvy investors. With tactical indicators suggesting growth, 2022 might just be a year of resilience and recovery for the European market.

The past few weeks have seen weak valuations across equity markets. While many look to the Omicron variant as the main culprit, the correction may have more to do with the recent Fed pivot.----- 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, bring you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 6th at 2:30 p.m. in New York. So let's get after it. While there's evidence the past few weeks have been rough for equity investors, there's a lot of debate around why stocks have been so weak. To us, it seemed like too much attention had been put on the new COVID variant, Omicron, as the primary culprit. Our focus has been much more on the Fed's more aggressive pivot on tapering asset purchases. Last Tuesday, Fed Chair Jay Powell told Congress that it was time to retire the word 'transient' when talking about inflation. This was a significant change for a Fed that had been arguing inflation would likely settle back down next year as supply chains adjusted to the increased demand. As a result, the Fed is now likely to reduce its asset purchase program - known as quantitative easing, or QE - twice as fast as it had previously told us. In short, we now expect the Fed to be completely done with its QE program by the end of March. That is quite a speedy exit in our view and is likely to leave a mark on asset prices. Hence, the sharp correction in stocks last week, especially the most expensive ones. Importantly, this move by the Fed is very much in line with our mid-cycle transition narrative that regular listeners should recognize. From an investment standpoint, the most important thing one needs to know about the mid-cycle transition is that valuations typically come down. In S&P 500 terms, it's typically 20%. So far, we've seen valuations come down by only 10%, making this normalization process only about halfway done, at least at the index level. The good news is many individual stocks have gone through a derating of much greater than 20% already. The bad news is that while some of the most expensive stocks have been hit the hardest, they still look expensive when normalizing for the period of over-earning these companies enjoyed in 2021. Sectors we think look particularly vulnerable include consumer discretionary and technology stocks. Sectors that look cheap are health care and financials. Another consideration for investors is the fact that this White House appears to be more focused on getting inflation under control, rather than keeping the stock market propped up. This might give the Fed cover to stay the course on its plans to withdraw policy accommodation more aggressively. In other words, investors should not be so confident the Fed will reverse course quickly if stocks continue to wobble into year end. Finally, the new variant can't be completely ignored and does pose a risk to demand. However, we always expected another big wave of COVID this winter as the cold weather set in. In fact, the recent spike in cases in the US are almost exclusively the Delta variant. In other words, we would be seeing this spike with or without Omicron's arrival. This is one of the reasons we've been expecting demand to disappoint in the first quarter and another thing that markets will have to deal with as we go into next year. Bottom line, expect markets to remain volatile into year-end as investors are forced to chase and de-risk depending on the price action. In short, moves up and down will be accentuated by asset managers trying to keep up with their benchmarks. In such an environment, we recommend investors continue to keep their risk lower than normal with a focus on large cap quality stocks trading at a reasonable valuation. We expect that over the next three to four months, markets will give us a much fatter pitch to swing at as the Fed completes its exit from QE and growth bottoms. 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.

One of our most controversial calls for 2022, that the Fed won’t hike interest rates next year, faces renewed scrutiny amidst high inflation, signals on tapering, and today's employment report.----- 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, December 3rd at 2:00 p.m. in London. We recently published our year ahead outlook for 2022 and right there on the cover, near the top, is one of Morgan Stanley Research's most controversial calls: that the U.S. Federal Reserve will not raise interest rates next year. Over the last week, more than one investor has pointed to this report and asked if it still applies. After all, inflation has been high, a situation that tends to call for higher interest rates to cool the economy. And Federal Reserve officials have been increasingly vocal about the merits of slowing their bond buying, accelerating the so-called tapering, even more quickly than they originally intended. Seeing the economy is strong and in less need of that additional support. If the Fed is going to slow down and then stop its bond buying more quickly, the argument goes, surely higher interest rates must be right around the corner. But there's an interesting phenomenon here. When you talk to most investors, they view both higher interest rates and fewer bond purchases as pretty similar things. Both actions, at their core, signal less central bank support for the economy and for markets. But maybe, just maybe, central banks view the world a little differently. For them, buying any bond, even fewer of them, still represents additional support for the economy. But in contrast, increasing interest rates... well, that's different. That's not additional support, that's actively tightening monetary policy. At the end of the day, this question is up to the central bankers. But if they do see a genuine distinction between these two actions - a difference that isn't necessarily as apparent to many investors - a faster taper may be able to coexist with a later first interest rate hike. That, at least, is how we see it at Morgan Stanley Research where our forecast is for exactly that - the Fed to accelerate the pace of its taper but not raise interest rates next year. But there's one more wrinkle in this story. While we think the Federal Reserve will ultimately wait longer than most people expect to raise interest rates next year, there's little reason for them to make that clear now. Inflation is still high and probably won't start to fall for several months. Economic data has been strong and today's employment report showed yet another decline in the unemployment rate. We see little reason why the Fed would want to commit not to take action right now, even if we think that's what they ultimately might do. Why does that matter? It will mean that in the near term, the Federal Reserve will appear to be taking support away from the economy and for markets. After extraordinary intervention to support markets and the economy, the central bank training wheels are coming off, so to speak, and this impact may be uneven. We think this creates the greatest challenge for highly valued growth stocks in the U.S. and emerging market assets and suggests that investors be patient before trying to buy both. 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.

Chief Asia and Emerging Markets Strategist Jonathan Garner highlights the key debates around his team’s outlook on the region’s growth, policy changes and more in the coming year.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Gardner, Chief Asia and Emerging Markets Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the 2022 outlook for Asia equities and some of the key debates for next year. It's Thursday, December the 2nd at 7:30am in Hong Kong. Since we published our year ahead outlook in mid-November, we've had the opportunity to debate the contents with clients in a number of formats, including presentations at our 20th Annual Asia Summit. So today I'd like to share that feedback and focus on some key debates. Our first debate is, why aren't we more bullish on Asia equities given our economics team's constructive view on 2022 global growth? The answer is that mapping GDP growth forecasts into company earnings growth forecasts is problematic since headline revenue growth is only one driver of earnings per share growth. Margins and leverage are also crucial, and even then, the sector breakdown of earnings growth in listed equities does not always match that of the economy as a whole. That said, broadly speaking, we are more constructive on Japan earnings growth than Emerging Markets and Asia earnings growth, given stronger relative gearing to the US, Europe and developed markets GDP growth, and the broad sector mix of export earnings and global cyclicals in Japan. We are anticipating earnings growth to continue next year and beyond consistent with continued global economic expansion. We expect 13% earnings per share growth from Tokyo's Stock Price Index “TOPIX" - in Yen - but only 8% for the MSCI Emerging Markets Index - in dollar terms. But it's fair to say that whilst we’re in line with bottom-up consensus for TOPIX, we're around 500 basis points below consensus for emerging markets. And in aggregate, this has a lot to do with the macro headwinds of our house forecast of dollar strength for Emerging Markets, but also specific sectoral headwinds which we anticipate in areas like China Internet and Asia Semis and Tech hardware in Korea and Taiwan. Another key factor to consider is clearly what's in the price, and we think emerging markets, which are trading around 13x consensus forward P/E - or around the 60th percentile of the 5-year range - still have some downside to valuations over the next year as a whole, whilst we are comfortable with Japan valuations. Our second debate was, why we're not enthusiastic about buying back China equities. Here, we think risk/reward has not yet tilted definitively to the positive, particularly for offshore China growth stocks. We think earnings estimates still need to come down significantly further and similarly to Asia and emerging markets overall, valuations are not particularly cheap - at around 13x consensus forward price to earnings multiple for MSCI China. For sure, China's monetary policy is gradually changing to be more accommodative, and some measures have been taken to re-stimulate property sector demand. However, the Chinese economy has developed downward momentum over the summer and autumn and still faces significant downside risk this winter as a result of prior policy tightening and factors such as COVID Zero lockdowns on the consumer and the impact of regulatory reset on private sector capital spending. Our proprietary indicator of Global Multinational Corporations' sentiment, vis-a-vis their Chinese operations, has just reported its biggest ever quarterly decline and is now at the second lowest since we began our regular quarterly survey. The third debate was, why are we constructive on emerging markets energy? Our answer is that the energy sector and energy sensitive markets are typically later cycle performers, and early next year will mark the second anniversary of the short but intense COVID-driven recession, which at one point marked the first time ever that oil prices went negative. We've come a long way since then in terms of demand recovery, but more is likely still to come if our commodities team is right that Brent can trade over $90 a barrel in 2022. This is the payback for underinvestment in conventional energy supply in recent years, mainly due to ESG concerns. So, it's an example of where our house view on strong global growth in 2022 and 2023 does lead directly to an investment conclusion for a particular sector. And MSCI EM Energy is trading at book value versus 1.9x price to book for the index, and with a free cash flow yield of almost 9%. Before I close, there is a lot of discussion around the new COVID 19 variant, Omicron, and whether it changes our views. At present, we're in early days on this variant and as such, it doesn't change our already cautious view on the outlook for Asia equities. 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.

The Omicron variant of COVID-19 has investors concerned about potential new restrictions, but the onus lies most on state and local governments who, for now, are awaiting more information on infection rates and severity.----- 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 U.S. public policy and financial markets. It's Wednesday, December 1st at 11:00 a.m. in New York. Not surprisingly, our client conversations this week have been all about Omicron, the new COVID 19 variant that our biotech team thinks may increase infection rates and reduce vaccine effectiveness. In particular, clients want to know if the new variant will lead to fresh government restrictions and crimp the U.S. economic outlook. While the federal government gets much of the attention here, we think the key to sizing up this variable lies in understanding how state and local governments will behave. These are the jurisdictions that have generally driven mask mandates, indoor dining restrictions and other activities. And while there's much to learn about Omicron, here our initial assessment is that the bar is quite high for states and locals to take action, and that should limit downside risk to the economy. What drives our view? In short, ever since states began lifting restrictions in late spring of 2020, their behavior has mostly been influenced by hospital capacity. Of course, some states lifted restrictions faster than others, but in most cases where restrictions were tightened, rising COVID hospitalizations and lack of bed capacity were cited as the culprits. With the availability of vaccinations in the U.S. and the high vaccination rate among vulnerable populations, risks to hospital capacity have lessened. That's because while COVID can infect the vaccinated, they are far less likely to get sick in a way that lands them in the hospital. So that means, when it comes to sizing up if Omicron will lead to government restrictions on economic activity, it's less about whether vaccines will prevent infection, but if they can limit hospitalizations. While there's still not a lot of information, and thus outlooks could easily change as data on the new variant is collected, our biotech research team's base case is that Omicron is not more virulent than the currently dominant Delta variant. Further, the U.S. government continues to express the view that vaccines will provide protection against severe disease. Taken together, this would suggest that as long as the U.S. can sustain its vaccine campaign, including the current push for boosters, the economy may only face manageable headwinds. For fixed income investors, that means Treasury yields should still trend higher. And for credit investors, particularly in COVID sensitive municipal bond sectors like airports and hospitals, we see fundamental risks as manageable. Yet investors should probably focus intently on what would change this view, as this ‘goldilocks outcome’ is mostly in the price of credit and equity markets already. And here again, we say focus on news about Omicron's severity, which is expected within the next few weeks. If data shows it to drive both more infection and more severe sickness, then hospital capacity could be challenged, leading state and local governments to reluctantly reimpose some restrictions. And of course, consumers could react to this signal and change their own behavior - thinking twice about that next flight, for example. Yet perspective is important here, and even this negative outcome is more likely an economic setback than a disaster, as our biotech team notes that pharmaceutical companies may be able to turn around new boosters to address the challenge within a few months. That in turn means there's likely to be opportunities in credit and equity markets if this riskier case is the one that plays out. We'll, of course, be tracking it all here and checking in with you as we learn more. 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.

Last week’s news of the Omicron variant of COVID-19 has raised questions about transmissibility, vaccine efficacy, and virus mortality. Where does this variant leave us in the fight against COVID-19 and how are markets reacting?----- 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 AnalystAndrew Sheets And on this special edition of the podcast, we'll be talking about a new COVID variant and its impact on markets. It's Tuesday, November 30th at 2p.m. in London.Matthew Harrison And it's 9:00 a.m. in New York.Andrew Sheets So Matt, first things first, you know, we've seen a pretty major development over the American Thanksgiving holiday. We saw a new COVID variant, the omicron variant, kind of come into the market's attention. Can you talk just a little bit about why this variant has gotten so much focus and what do we know about it?Matthew Harrison Sure. I think there are probably three major factors that have driven the focus. The first thing is there was clear scientific concern because of the number of mutations in the variant. And specifically, there are over 50 mutations, 32 of which are in the spike protein region, which is where vaccines are targeted. And then a number in the receptor binding domain, which is where the antibodies typically tend to bind. So the antibodies that either vaccines or antibody therapies create. And what we know when we look at many of these mutations is they're present in other variants: gamma, delta, alpha, beta and we know that many of these mutations in a pair one or two have led to reduction in vaccine effectiveness. And so, when they're combined all together, from a scientific standpoint, people were very concerned about having all of those mutations together and what that would mean in terms of vaccine escape.Andrew Sheets So Matt, this is obviously a challenging situation because this is a new variant. It's just been discovered. And yet, you know, a lot of people are trying to figure out what the longer-term implications could be. So, you know, when you look at this with the kind of a limited amount of information, you know, what are the key characteristics that you're going to be watching that that you think we should care about?Matthew Harrison There are probably three things that I'm focused on and we can probably touch on in detail. So the first one is transmissibility, and the reason for that is if this variant overtakes Delta and becomes dominant globally, then we're going to care about the two other factors a lot more, which is vaccine escape and lethality. However, if it's not more transmissible than Delta and Delta remains the dominant variant, then this may be an issue in small pockets, but ultimately will fade and continue to be overtaken by Delta. And so that's why transmissibility is the primary focus. And so what do we know about transmissibility right now? We have a couple of pieces of information out of South Africa. The first is they have sequenced a number of recent COVID patients. And in those sequences, the vast majority or almost all of them have been Omicron. So that suggests that it is overtaking Delta. But again, sometimes sequence results can be biased because they're not a population sample and they're a selection of a certain subset of people. The second piece of information, which to me is more compelling, is I'm sure everybody's aware of the PCR tests. There's a certain kind of deletion here in this variant that that that you can pick up with a PCR test and so you can see the frequency of that deletion. And that that frequency has risen from about a background rate of about 5% in the last week and a half to about 50% of the PCR tests coming back suggestive of this variant in South Africa. And so that's a much bigger sample size than the sequencing sample size. And so that suggests at least in the small subset that you're seeing greater transmissibility compared to Delta. Now it's going to take time to confirm that. And now that we've seen cases globally in a lot of countries over the next week or two, everybody's going to be watching how quickly the Omicron cases rise compared to Delta to confirm whether or not it's more transmissible than Delta.Andrew Sheets This question of vaccine evasion. There's there has been some increased concern about this new variant that it might be able to evade vaccines. Why do people think that? And you know, how soon might we know?Matthew Harrison Why don't we start with the timeline, because that's the simpler part. The experiments to figure that out take about two weeks. And just so everybody has the background on this, you need to take the virus, you need to grow it up. And once you have a sample of it, then you take blood from people that have recovered from COVID and blood from people that have been vaccinated that are full of those antibodies. And you put them in the in the dish and you find out how much virus you kill. And that'll tell you how effective the serum from vaccinated or previously infected individuals are against the new variant. So that process typically takes about two weeks. So then why are people worried about vaccine evasion with this variant? Primarily because of the known mutations that it carries and the unknown mutations. And of the known mutations that it carries, it carries the same set of mutations as in beta, and the beta variant had significant vaccine evasion properties that never became dominant, but it did reduce vaccine effectiveness by about six-fold. And so, I think the concern is with those mutations, plus a range of other mutations known to have vaccine evasion properties, having them all together has really significantly increased concern about how much that may hurt the vaccine's ability to stop infection.Andrew Sheets And, Matt, so you talked about the importance of transmissibility, you know, you talked about some of the reasons why the concerns are higher around vaccine evasion with this variant. And the last thing you talked about was the lethality of this variant. And again, you know, what are you looking for there? Is there anything that concerns you with the information that we know and when might we know more?Matthew Harrison So this is the hardest question because as is typical, you get a lot of anecdotal reports about what's happening with recently infected patients, but it takes a while, on order of four to five weeks, to really understand if there is a significant difference in mortality or hospitalization. So we have very little information around those factors. You have seen in the capital region, in South Africa, where you've where you've seen these rising cases, a rise in hospitalizations, but we don't know if all those cases are Omicron cases or not. And we haven't seen mortality at all. But again, with recent infections, it usually takes four or five weeks to start to see the potential impact of those infections on mortality.Matthew Harrison And Andrew, I think one other thing which is important to mention is while we're while we're talking about severity of disease and lethality, we have to remember that in addition to vaccines, we do have now other effective treatments, including antibody therapies and oral therapies. And while some antibody therapies are likely not to work against Omicron, at least two or three of them are. And so you have you will have some effective antibody therapies. And then the oral therapies, given their mechanisms of action, should not be impacted. So we will have oral therapies in terms of treatment. So hopefully, even if we do get a scenario where there is significant impact on vaccine efficacy, this will not be like going back to the beginning of the pandemic, where we didn't have other effective treatments available.Matthew Harrison Andrew, unlike normal episodes, maybe it'll be my chance since the markets have been so volatile. How has this impacted your outlook on the markets in the near to medium term?Matthew Harrison I know inflation and the inflation debate and the impact of central banks on inflation has been a sort of key debate that I've heard you guys reflecting on.Andrew Sheets Yeah. So I think probably the thing I should say up front is at the moment, we don't think we have enough evidence around this variant to change our baseline economic forecast to change that optimistic view on growth. Now what it might change is some of the timing around it, and I think we saw a little bit of this with the Delta variant. Where, you know, that was a big development in 2021, you know, people didn't see that coming. And you know, if you step back and think about this year, the market was still good, yield still rose, there was a lot of market movement, very consistent with better economic growth if you take the year as a whole, even though you had this variant, but the variant did introduce some kind of twists and turns along the way. So you know, that's currently the way that we're thinking about this new omicron variant that it is not likely or we don't know enough yet to be confident that it would really change that economic outlook, especially because we think there are a lot of good reasons why growth could be solid, but it might introduce some near-term uncertainty. You know, the interesting thing about, as you mentioned, inflation is that it could affect inflation in both directions. It could cause inflation to be higher, for example, if it, you know, causes shutdowns in countries that are important for producing key goods. And you can't get the things that you want, and the price goes up. But it could also drive prices down. You know, on last Friday oil prices fell by over 10%. You know, that is a big part of inflation certainly as most people experience it. Gas prices will be lower based on what happened on Friday. So that can drive inflation down so it can cut both ways.Matthew Harrison Andrew, it's been great talking to you. Thanks for your thoughts.Andrew Sheets Matt, always a pleasure to talk to you.Matthew Harrison As a reminder, 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.

With last week’s news of the Omicron variant of COVID-19, markets sold-off sharply on Friday, but beyond the headlines, there may be other underlying factors at play.----- 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, November 29th at 1:00 p.m. in New York. So let's get after it. Last week, the big news for markets was this new COVID variant named Omicron. While we don't yet know the characteristics of this variant with respect to its transmission and mortality rates, some nations are already acting with new restrictions on travel and other activities. These new restrictions is what markets were fearing the most on Friday, in our view. I'm also confident that markets were already expecting some seasonal increases in cases as we enter the winter months. This is why I'm not so sure Friday's sharp sell-off in equity markets was as much about Omicron as it was just a market looking for an excuse to go lower. In fact, equity markets had already been weak heading into Thanksgiving Day - a period that is almost always positive for stocks. This was before Omicron was a real concern, so why would that be the case? As we laid out in our year-ahead outlook, the combination of tightening financial conditions and decelerating growth is usually not bullish for stocks. When combined with one of the highest valuations on record, this is why we have a very unexciting 12-month price target for the S&P 500. Finally, as discussed on this podcast for the past 6 weeks, stocks typically do well from September to year end if they are already up until that point. However, we felt like that seasonal trade would be tougher after Thanksgiving, as the Fed began to taper its asset purchases and institutional investors moved to lock in profits rather than worrying about missing out on further upside. With retail a large buyer during Friday's sharp sell-off, it appears that the institutional investors were the ones selling. In short, it looks like that switch to locking in profits may have begun. Today's bounce back also makes sense in the context of a market that understands Omicron is probably not going to lead to a significant lockdown. In fact, we're already hearing reassuring words from the authorities making those decisions. The bottom line is that markets were already choppy, with many higher beta indices and stocks trending lower before this latest COVID variant. Breadth has also been weak, with erratic leadership. High dispersion between stocks is another market signal that suggests the rising tide may be going out. Our view remains consistent - the investment environment is no longer rich with opportunity, which means one must be more selective. In a world of supply shortages, we favor companies with high visibility on earnings due to superior pricing power or cost management. We also think it makes sense to be very attendant to valuation and not overpay for open ended growth stories with questionable profitability. From a sector standpoint, Healthcare, REITs and Financials all fit these characteristics. 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.