Thoughts on the Market

As the world turns to the U.K., the country faces a host of domestic and international economic challenges, but there may yet be some bright spots for investors.-----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, September 9th at 2:00pm in London.Queen Elizabeth II passed away yesterday. She was the only monarch most in Britain have ever known, a steady constant over a period of enormous global change. She defined an era, and will be missed. The eyes of the world have now turned to the United Kingdom, and they do so at a time when the country is facing an unusually high level of uncertainty.The U.K. economy, which was recently surpassed in size by India, is still the worlds sixth largest. But it’s currently being buffeted by a host of economic challenges. Some are domestic, some are international, but combined they create one of the trickiest stories in the global economy.First among these challenges is inflation. Rising costs for energy have driven Consumer prices in the U.K. up 10% year-over-year, but even excluding volatile food and energy, U.K. core inflation is still over 6%. And elevated inflation is not expected to be fleeting. Market-based estimates of U.K. inflation, over the next 10 years, are the highest since 1996.Those elevated prices have driven U.K. interest rates higher, but even so, U.K. rates relative to inflation are still some of the lowest of any major economy, which makes holding the currency less attractive. That has weakened the British Pound, but since the U.K. runs a current account deficit, and imports more than it exports, imported things have become more expensive, creating even more inflationary pressure.The U.K’s decision to leave the European Union, its largest trading partner, is another complication. By restricting the movement of labor, it’s created a negative supply shock and increased costs.  And it has increased the fiction in trading abroad, especially with Europe, making it harder for U.K. exporters to take advantage of the country’s weaker currency.The response to all this high inflation will likely be further rate hikes from the bank of England. But this has the potential to feed back into the economy unusually fast. Over here, many student loan payments are tied to the bank of England rate. And the rate on U.K. mortgages is often fixed for only 2 to 5 years, in contrast to the 30 year fixing common in the United States. That means the impact of higher interest rates into higher mortgage costs could be felt very soon.For U.K. assets, the fact that a 10 year U.K. Government bond yields less than a 6-month U.S. Treasury bill, and much less than U.K. inflation, creates poor risk/reward. The Pound could continue to weaken, given all of these myriad economic challenges. But one bright spot might be the equity market, the FTSE 100. Trading at about 9x next year earnings, and benefiting from a weaker currency as many of these companies sell product abroad, we forecast stocks in the U.K. to outperform those in the Eurozone.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.

The impact of quantitative monetary policies is hard to understand, for investors and academics alike, but why are these impacts so complex and how might investors better understand the market implications?-----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 Thursday, September 8th, at 10 a.m. in New York. QT is the talk of the town. QT stands for quantitative tightening, which is meant to contrast it with QE, or quantitative easing. QT sounds intimidating, especially when respected investors mention the term and, at the same time, ring the fire alarm on financial news networks. Unfortunately, the exact workings of QT and QE and their ultimate impact on markets aren't well understood. And that's not just a comment about the general public's understanding. It even applies to investors who have long dealt with quantitative policies and for academics who have long studied them. There are four reasons why the impact of quantitative monetary policies, as the Fed has implemented them, is hard to understand. First, different institutions take the lead in determining the impact of QE versus QT. The Fed determines the first round impact of quantitative easing, while the U.S. Treasury and mortgage originators determine the first round impact of quantitative tightening. Second, as the phrase "first round impact" implies, there are second round impacts as well. In the case of quantitative easing, the first round occurs when the Fed buys a U.S. Treasury or Agency mortgage backed security, also known as an agency MBS, from an investor. The second round occurs when that investor uses the cash from the Fed to buy something else. In the case of quantitative tightening, the first round occurs when an investor sells something in order to raise the cash that it needs. What does it need the cash for? Well, to buy a forthcoming Treasury Security or agency MBS. The second round occurs when the U.S. Treasury auctions that security or when a mortgage originator issues an agency MBS in order to raise the cash that the Fed is no longer providing. Third, QE and QT affect different markets in different ways. QE affects the Treasury and agency MBS markets directly in the first round. But in the second round, investor decisions about how to invest that cash could affect a wide variety of markets from esoteric loan products to blue chip equities. In that sense, some of the impact of QE is indirect and could affect some markets more than others. Similarly with QT, investor decisions about what to sell could affect a large number of markets, again some more than others. In addition, what the U.S. Treasury issues and what mortgage originators sell can change over time with financing needs and different market environments. Finally, markets price these different effects with different probabilities and at different times. For example, when the Fed announces a QE program, we know with near certainty that the Fed will buy Treasuries and agency MBS and generally know how much of each the Fed will buy. So investors can price in those effects relatively soon after the announcement. But we don't know, with nearly the same probability, what the sellers of those treasuries and agency MBS will do with the cash until they actually get the cash from the Fed. And that could be months after the announcement when the Fed actually buys the securities. Figuring out the effect on markets from QT is even more complicated because even though we know what the Fed will no longer buy, we don't know exactly what or how much the U.S. Treasury or mortgage originators will sell. If all of this sounds complex, believe me it is. There are no easy conclusions to draw for your investment strategies when it comes to QT. So the next time someone rings the fire alarm and yells QT, first look for where there might be smoke before running out of the building or selling all of your risky assets. 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 find the show. 

While home price appreciation appears to be slowing, and a rapid increase in supply is hitting the market, how will housing prices fare through the rest of the year and into 2023? Co-Heads of U.S. Securitized Products Research Jay Bacow and Jim Egan discuss.-----Transcript------Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow. The other Co-Head of U.S. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing supply and demand in the U.S. housing market. It's Wednesday, September 7th, at 3 p.m. in New York. Jay Bacow: All right, Jim. Housing headlines have started to get a little more bleak. Home price appreciation slowed pretty materially with last week's print. Now, your call has been that activity is going to decrease, but home prices are going to keep growing. Where do we stand on that? Jim Egan: We would say that the bifurcation narrative still holds. We think housing activity metrics, and when we say housing activity we're specifically talking about home sales and housing starts, have some continued sharp declines in the months to come. But we do think that home prices are going to continue growing on a year over year basis, even despite a disappointing print that you mentioned from last week. Jay Bacow: But I have to askv, what are you looking at that gives you confidence in your home price call? Where could you be wrong given the slowdown we just saw? Jim Egan: We say a lot of fancy sounding things when we talk about the housing market, but ultimately they're just different ways of describing supply and demand. Demand is weakening. That's that drop in activity we're forecasting. But supply is also very tight and that contributes to our view that while home price growth needs to slow, it should remain positive on a year over year basis. Jay Bacow: All right, but haven't some metrics of supply been moving higher? Jim Egan: Look, we knew we were not going to be able to say that supply was historically tight forever. Existing inventories are now climbing year over year for the first time in 37 months. And another very popular metric of supply, months of supply, is effectively getting a 1-2 punch right now. Months of supply measures how much the current supply of housing listed for sale, would take to clear at current demand levels. So in a world in which supply is increasing and demand is falling, you have a numerator climbing and a denominator falling, so you're effectively supercharging months of supply, if you will. We were at a cycle low of 2.1 months of inventory, the lowest we've seen in at least three and a half decades, in January of this year. We're at 4.1 months of supply just six months later. Jay Bacow: So that number is a lot higher, but 4.1 months of supply is still really low. Isn't there some old saying that anything less than six months of supply is a seller's market? So wouldn't that be good for home prices? Jim Egan: Yes. And given recent work that we've done, we think that that saying is there for good reason. If we go back to the mid 1980s, so the Case-Shiller index that we're forecasting here that's as far back as this index goes. And every single time that months of supply has been below six, the Case-Shiller index was still appreciating six months forward. Home prices were still climbing, six months forward. So the absolute level of inventory is in a pretty healthy place despite the recent increases. However, that rate of change is a little concerning. We've gone from 2.1 months to 4.1 months over just six months of actual time, and when we look at that rate of change historically, it actually does tend to predict falling home prices a year forward. So, absolute level of inventory leaves us confident in continued home price growth, but the rate of change of that underlying inventory calls continued home price growth in 2023 into question. Jay Bacow: So we're going to have more inventory, but the pace has been accelerating. How do we think about the pace of that increase?Jim Egan: If that pace were to continue at its current levels, that would make us really concerned about home prices next year. But we do think the pace of inventory growth is going to slow and we think that for two main reasons. The two biggest inputs into inventory are new inventories and existing. New inventories, and we've talked about this on the podcast before, we think they're about to really slow down. Homebuilder confidence is down 43% from cycle peaks in November of 2020. Part of that's the affordability deterioration we talked about earlier, but it's also because of a backlog in the building process. Single unit starts are back to 1997 levels. Units under construction, so between starts and completions, are back to 2004 levels - it is taking longer to finish those homes. And we have had a forecast that we thought that was going to lead to single unit starts slowing down, it finally has over the past two months after plateauing for almost a year. We think they're going to continue to fall pretty precipitously in the back half of this year, which should mean that new inventory stop climbing at the same pace that they've been climbing. Existing inventories also should stop their current pace of climb because of the lock in effect that we've talked about here before. Effectively, current homeowners have been able to lock in very low mortgage rates over the course of the past two years. They're not going to be incentivized to list their homes at similar rates to historical places because of that lock in effect. So for both of those reasons, we think the pace of increase in inventory is going to slow, and that's why we continue to think that home prices are going to grow on a year over year basis. They're just going to slow from 18% now, to 9% by the end of this year, to 3% by the end of 2023. Jay Bacow: Okay. So effectively the low amount of absolute supply is going to keep home prices supported. The change in the amount of supply makes us  a little bit more cautious on home prices on a longer term outlook. But we think that pace of that change is going to slow down.Jay Bacow: Jim, always a pleasure talking to you. Jim Egan: Great talking to you too, Jay. Jay Bacow: And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review on the Apple Podcasts app and share the podcast with a friend or colleague today.

While interest rates have already weighed on asset markets this year and growth continues to slow, the Fed seems poised to continue on its tightening path, meaning investors may need to prepare for part two of our Fire and Ice narrative.-----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 Tuesday, September 6th, at 9 a.m. in New York. So let's get after it. At the risk of stating the obvious, 2022 has been a challenging year for stock investors of all stripes. The Russell 3000 is down approximately 18% year to date, and while growth stocks have underperformed significantly it's been no picnic for value investors either. As far as sectors only energy and utilities are up this year, and just 24% of all stocks in the Russell 3000 are in positive territory. To put that into context, in 2008, 48% of the Russell 3000 stocks were up on the year as we entered the month of September and then the bottom dropped out. Suffice it to say, this year has been historically bad for stocks. However, that is not a sufficient reason to be bullish in our view. As bad as has been for stocks, it's been even worse for bonds on a risk adjusted basis. More specifically, 20 year Treasury bonds are now down 24% year to date, and the Barclays AG Index is off by 11%. Finally, commodities have been a mixed bag too, with most commodities down on the year, despite heightened concerns about inflation. For example, the CRB RIND Index, which measures the spot prices of a wide range of commodities, is down 7% year to date. Cash, on the other hand, is no longer trash, especially if one has been able to take advantage of higher front end rates. So what's going on? In our view, asset markets are behaving right in line with the fire and ice narrative we laid out a year ago. In short, after ignoring the warning signs from inflation last year and thinking the Fed would ignore them too, asset markets quickly woke up and discounted the Fed's late but historically hawkish pivot to address the sharp rise in prices. Indeed, very rarely has the Fed tightened policy so quickly. Truth be told, as one of the more hawkish strategists on the street last December, I never would have bet the Fed would be doing multiple 75 basis point hikes this year, but here we are. And remember, don't fight the Fed. While the June low for stocks and bonds was an important one, we've consistently been in the camp that it wasn't the low for the S&P 500 in this bear market. Having said that, we are more confident it was the low for long term treasuries in view of the Fed's aggressive action that has yet to fully play out in the real economy. It may have also been the low for the average stock, given how bad the breadth was at that time and the magnitude of the decline in certain stocks. Our more pessimistic view on the major index is based on analysis that indicates all the 31% de-rating in the forward S&P 500 P/E that occurred from December was due to higher interest rates. We know this because the equity risk premium was flat during this period. Meanwhile, forward earnings estimates for the S&P 500 have come down by only 1.5%, and price earnings ratio's back up 9% from where it was. With interest rates about 25 basis points below the June highs, the equity risk premium has fallen once again to just 280 basis points. This makes little sense in a normal environment, but especially given these significant earnings cuts we think are still to come. With the Fed dashing hopes for a dovish pivot on this policy a few weeks ago, we think asset markets may be entering fire and ice part two. In contrast with part one, this time the decline in stocks will come mostly through a higher equity risk premium and lower earnings rather than higher interest rates. In fact, our earnings models are all flashing red for the S&P 500, and we have high confidence that the decline in forward S&P 500 earnings forecasts is far from over. In short, part two will be more icy than fiery, the opposite of the first half of the year. That's not to say interest rates don't matter, they do and we expect bonds to perform better than stocks in this icier scenario. Importantly, if last Thursday marked a short term low for long duration bonds, i.e. a high in yields, the S&P 500 and many stocks could get some relief again as rates come down prior to the next rounds of earnings cuts that won't begin until later this month. 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 to find the show. 

There has been a lot of market movement in recent months, so as we exit the summer, what are the market stories and valuations that investors should be aware of?-----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, September 2nd at 3 p.m. in London. As summer draws to a close, there is quite a bit that investors are coming back to. Here's a state of play of our global economic story, and where cross-asset valuations sit today. The global economy faces challenges, but these challenges differ by region. The U.S. economy is seeing elevated inflation and still strong growth, as evidenced by today's report that the U.S. economy added another 315,000 new jobs last month. That makes it likely that the Federal Reserve will have to air on the side of raising rates more to bring inflation down, which would further invert the U.S. yield curve and, in our view, support the U.S. dollar. Europe also has high inflation, but of a different kind. Europe's inflation isn't nearly as pronounced in so-called core elements, and it isn't showing up in wages. Instead, Europe is in the midst of a major energy crunch, that in our base case will push the economy into a mild recession. Markets expect that the European Central Bank will raise rates significantly more than the U.S. Federal Reserve over the next 12 months, but given our risks to growth we disagree, a reason we forecast a weaker euro. The economic situation in the UK is also very challenged, leaving us cautious on gilts and the UK pound. China and Japan are very different and core inflation in both countries is less than 1%. China continues to face dual uncertainties from a weakening property market and zero-covid policy, factors that lead us to think it is still a bit too soon to buy China's equity market, despite large losses this year that have driven much better valuations. We remain more optimistic on Japanese equities on a currency hedged basis, given that it remains one of the few developed market economies where the central bank is not yet tightening policy. To take a closer look at those global equity markets we enter September with the U.S. S&P 500 stock index trading at about 17x earnings. That's down from over 20x earnings at the start of the year, but it's still above average. U.S. small cap valuations, at about 11x earnings, are less extreme. Stocks in Europe, Australia, Japan, China and emerging markets all trade at about 11 to 12x forward earnings at the index level. Of all of these markets our forecasts imply the highest returns, on a currency hedged basis, in Japan. In bonds, it's important to appreciate that yields remain much higher than they were a year ago. As we discussed last week, investors can now earn about 3.3% on 6 month U.S. government treasury bills, U.S. investment grade bonds yield almost 5% and U.S. high yield yields over 8.5%. In Europe, yields on European investment grade credit and Italian 10 year bonds are pretty similar, a spread at which we think European investment grade bonds are more attractive. Markets have been moving over the summer. We hope our listeners have managed some time to rest and recharge and that this discussion has given some helpful context to where the different stories and valuations in the market currently sit. 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.

As consumers around the globe scale back on goods spending, how are Asian export markets impacted and where might opportunities lie?-----Transcript-----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanly's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the challenging landscape for Asia's exports post-COVID. It's Thursday, September 1st, at 8:30 a.m. in Hong Kong. As listeners of the show are no doubt aware, the post-COVID recovery around the world has not been uniform, and each region is facing its own specific challenges. In Asia, one of those challenges is that the Asia export engine seems to be losing steam as goods demand continues to deflate. For instance, real export growth decelerated to just an average of 3% on a year on year basis in the past six months, as compared to a peak of 30% in April 2021. Whichever way you slice and dice Asia's exports, it is evident that the underlying trends are soft everywhere. Whether by destination or by product, there is simply pervasive weakness. Let's start with product: when we look at Asia exports by product across the different categories of consumer, capital and intermediate goods exports, we are seeing a synchronized slowdown. Commodities are the only product category which is holding up, supported by trailing elevated prices. But with industrial commodity prices falling by some 30% since their March peak, we think there is every chance that commodity exports will slow significantly too in the coming months. Now let's turn to destination. Demand is slowing in 70% of Asia's export destinations. While exports to the U.S. are still holding up, we expect that the slowing in the U.S. economy plus the continued normalization in goods spending, will weigh on exports to the U.S. too. Against this backdrop of weak aggregate demand, we see more downside for Asia's exports to the U.S. in the coming months. One of the reasons why Asia's exports are deflating rapidly is because developed markets consumers are shifting back into spending on services after an outsized spending on goods earlier during the pandemic. As a case in point, US spending on goods had risen by 20% between January 2020 and March 2021. Since reaching its peak in March 21, goods spending has been on a decelerating path, declining by 5%. We expect further weakness in goods spending as the share of goods spending still has not normalized back towards pre-COVID levels. Against this backdrop, investors should look at countries where domestic demand offsets the weakness in external demand. We continue to be constructive on India, Indonesia and Philippines as they are well placed to generate domestic demand alpha. Within this group, we believe that India is the best placed economy within the region for three reasons. First, we see a key change in India's structural story. Policymakers have made a clear shift in that approach towards lifting the productive capacity of the economy and creating jobs while reducing the focus on redistribution. Second, the India economy is lifting off after a prolonged period of adjustment. The corporate sector has delivered and the balance sheet in the financial sector has also been cleaned up. This backdrop of healthy balance sheets and rising corporate confidence bodes well for the outlook for business investment. Third, against this backdrop, we are seeing unleashing of pent up demand, especially in areas like housing and consumer durables. Finally, what about China - the largest economy in Asia? Typically when export slows down, we would expect China to be able to stimulate domestic demand. But in this cycle, while easing is already underway, the recovery in domestic demand is being held back by the housing market problem and its COVID management approach. We think that China domestic demand recovery should pick up pace by early next year as the full effects of its stimulus kicks in and private confidence lifts, thanks to China's anticipated shift to a living with COVID stance. 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 a colleague today.

While markets wrestle with high inflation and recession worries, investors will want to keep an eye on the rise in risk premiums and the outlook for long-run returns.-----Transcript-----Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Head of Cross-Asset Strategy for North America. Along with my colleagues, bringing you a variety of perspectives, today I'll focus on the current state of global cross-asset risk premiums. It's Wednesday, August 31st at 10 a.m. in New York. Markets in 2022 have been incredibly turbulent, and global cross-asset risk premiums have shifted dramatically year to date. Various markets have been buffeted by higher inflation and tighter policy, geopolitical risks and worries about recession. Some impacted much more than others. What this means is that there are segments of markets where risk premiums, that is the excess returns an investor can expect for taking on additional risk, and long-run expected returns look much more attractive than they were at the beginning of the year. And while expected returns and risk premiums have broadly risen, the improvements have been uneven across asset classes and regions. For example, we believe that compared to U.S. stocks, rest-of-world equities have seen equity risk premiums move much higher since December, and currently have an edge over U.S. equities in terms of risk reward, in line with our relative preferences. So let me put some actual numbers around some key regional disparities. Our framework, which incorporates expectations on income, inflation, real earnings growth and valuations, see U.S. equities returning about 7.5% annually over the next decade, compared to just 5.7% at the start of the year. However, a steep climb in U.S. Treasury yields from historical lows mean that from a risk premium perspective, U.S. equities is still below its 20 year historical average by nearly one percentage point. This is in contrast to other regions whose risk premiums have increased significantly more during the sell off. Notably, European equity risk premiums are 8.9%, close to a 20 year high, similarly for emerging markets at 5.3%, and Japanese equity risk premiums at 4.7%, also above average. And remember, higher risk premiums typically signal that it's a good time to invest in riskier assets. For fixed income, with nominal yields rising on the back of more persistent inflationary pressures and quantitative tightening, long-run expected returns are now higher than they were 12 months ago. In fact, we're now back to levels last seen in 2019. Our framework now predicts that ten year U.S. Treasuries can return 3.7% annually over the next decade, up from 2.2% just a year ago. Credit risk premiums, such as for corporate bonds, have also readjusted year to date. As with risk free government bonds, rising yields mean that long run expected returns for these bonds have improved significantly since the start of the year. In terms of numbers, our model forecasts for U.S. high yield risk premium, at 188 basis points compared to near nothing 12 months ago. So what does all this mean? Well, for one thing, as my colleague Andrew Sheets has pointed out in a previous Thoughts on the Market episode, lower prices, wider risk premiums and higher 10 year expected returns have raised our long-run expected returns forecasts for a portfolio of 60% equity and 40% high quality bonds to the highest it's been since 2019, above the 10 year average. So we believe that the case for a 60/40 type of approach remains. For another, it means that the opportunities for investors right now lie in relative value rather than beta, given our strategists macro outlook for the next 12 months is more cautious than our long-run expected forecast. So for example, based on our long-run expected returns, our dollar optimal portfolios favor segments of the markets with more credit risk premium, like high yield and emerging market bonds. And similarly, as I've mentioned before, our current cross-asset allocation has a preference for ex-U.S. equities versus the U.S. because of former's higher equity risk premium. The rest of 2022 will likely continue to be turbulent, but there is good news for investors with a longer term focus. 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. 

Amid global shocks across supply, commodities and the U.S. Dollar, central banks continue to fight hard against inflation, leading many to wonder if a global recession is imminent.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's chief global economist, along with my colleagues, bringing you a variety of perspectives. Today, I'll be revisiting a topic that's front and center: concerns about a global recession. It's Tuesday, August 30th, at 2p.m. in New York.One key market narrative right now is that the clouds of recession have been gathering globally. And the question that I get from clients every day, 'is a global recession upon us?'A recession is our baseline scenario for the Euro area. The flow of natural gas from Russia has been restricted and energy prices, as a result, have surged. We expect a recession by the fourth quarter but, as is so often the case, the data will be noisy. A complete gas cutoff, which is our worst-case scenario. That's still possible. On the other hand, even if somehow we had a full normalization of the gas flows, the relief to the European economy would only be modest. Winter energy prices are already partly baked in, and we've got the ECB with an almost single-minded focus on inflation. There are going to be more interest rate hikes there until the hard data force them to stop.Now, I am slightly more optimistic about the U.S. The negative GDP prints in the first two quarters of this year clearly cast a pall but those readings are misleading because of some of the details. Now, bear with me, but a lot of the headline GDP data reflects inventories in international trade, not the underlying domestic economy. Household spending, which is the key driver of the U.S. economy, averaged about 1.5% at an annual rate in the first half and the July jobs report printed at a massive 520,000 jobs. Since the 1970s, the U.S. has never had a recession within a year of creating so many jobs. But the path forward is clearly for slowing. Consumption spending was slammed by surging food and energy prices and more importantly, the Fed is hiking interest rates specifically to slow down the economy.So what is the Fed's plan? Chair Powell keeps noting that the Fed strategy is to slow the economy enough so that inflation pressures abate, but then to pivot or, as he likes to say, 'to be nimble.' That kind of soft landing is by no means assured. So, we're more optimistic in the U.S., but the Fed is going to need some luck to go along with their plan. The situation in China is just completely different. The economy there contracted in the second quarter amid very stringent COVID controls. The COVID Zero policies in place are slowly starting to get eased and we think more relaxation will follow the party Congress in October. But will freedom of mobility be enough to reverse the challenges that we're seeing on consumer spending because of the housing market? The recent policy action to address the housing crisis will probably help some but I fully expect that a much larger package will be needed. Ultimately, we'll need the consumer to be confident in both the economy and the housing market before we can make a rapid recovery.The world has been simultaneously hit by supply shocks, commodity shocks and dollar shocks. Central banks are pulling back on demand to try to contain inflation. Even if we avoid a global recession, it's really hard to see how economic activity gets all the way back to its pre-COVID trend.It's still the summertime, so I hope it's sunny where you are. You can worry about the storm later.Thanks for listening. If you enjoy this show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

With Fed messaging making it clear they’re not yet done fighting inflation, the market is left to contend with the recent rally and prepare to adjust growth expectations.-----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 29th, at 11 a.m. in New York. So let's get after it. After the Fed's highly anticipated annual meeting in Jackson Hole has come and gone with a very clear message - the fight against inflation is far from over, and the equity markets did not take it very well. As we discussed in this podcast two weeks ago, the equity markets may have gotten too excited and even pre traded a Fed pivot that isn't coming. For stocks, that means the bear market rally is likely over. Technically speaking, the rally looks rather textbook. In June, we reached oversold conditions with breadth falling to some of the lowest readings on record. However, the rally stalled out exactly at the 200-day moving average for the S&P 500 and many key stocks. On that basis alone, the sharp reversal looks quite ominous to even the most basic tactical analysts. From a fundamental standpoint, having a bullish view on U.S. stocks today is also challenging. First, there is valuation. As we have discussed many times in our research, the Price/Earnings ratio is a function of two inputs; 10 year U.S. Treasury yields and the Equity Risk Premium. Simplistically, the U.S. Treasury yield is a cost of capital component, while the Equity Risk Premium is primarily a function of growth expectations. Typically, the Equity Risk Premium is negatively correlated to growth. In other words, when growth is accelerating, or expected to accelerate, the Equity Risk Premium tends to be lower than normal and vice versa. Our problem with the view that June was the low for the index in this bear market is that the Equity Risk Premium never went above average. Instead, the fall in the Price/Earnings ratio from December to June was entirely a function of the Fed's tightening of financial conditions, and the higher cost of capital. Compounding this challenge, the Equity Risk Premium fell sharply over the past few months and reached near record lows in the post financial crisis period. In fact, the only time the Equity Risk Premium has been lower in the past 14 years was at the end of the bear market rally in March earlier this year, and we know how that ended. Even after Friday's sharp decline in stocks, the S&P 500 Equity Risk Premium remains more than 100 basis points lower than what our model suggests. In short, the S&P 500 price earnings ratio is 17.1x, it's 15% too high in our view. Second, while most investors remain preoccupied with the Fed, we have been more focused on earnings and the risk to forward estimates. In June, many investors began to share our concern, which is why stocks sold off so sharply in our view. Companies began managing the quarter lower, and by the time second quarter earnings season rolled around positioning was quite bearish and valuations were more reasonable at 15.4x. This led to the "bad news is good news" rally or, as many people claim, "better than feared" results. Call us old school, but better than feared is not a good reason to invest in something if the price is high and the earnings are weak. In other words, it's a fine reason for stocks to see some relief from an oversold condition, but we wouldn't commit any real capital to such a strategy. Our analysis of second quarter earnings showed clear deterioration in profitability, a trend we believe is just starting. In short, we believe earnings forecast for next year remains significantly too high. Finally, last week's highly anticipated Fed meeting turned out to be a nonevent for bonds, while it appeared to be a shock for stock investors. Ironically, given the lack of any material move in yields, all of the decline in the Price/Earnings ratio was due to a rising Equity Risk Premium that still remains well below fair market levels. The bottom line, we do think Friday's action could be the beginning of an adjustment period to growth expectations. That's good. In our experience, such adjustments to earnings always take longer than they should. Throw on top of that, the fact that operating leverage is now more extreme than it was prior to COVID, and the negative revision cycle could turn out to be worse than usual. Next week, we will attempt to quantify more specifically how challenging the earnings outcome might be based on an already reported macro data. 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 to find the show. 

Though returns offered by cash have been historically bad over the last 10 years, the tide has begun to turn on cash yields and investors will want to take note.-----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 26, at 2 p.m. in London. For much of the last 12 years, the question of whether to hold cash in a portfolio was really a question of negativity. After all, for most of that time, holding cash yielded nothing or less than nothing for those in Europe. Holding it implied you believed almost every other investment option was worse than this low bar. Unsurprisingly, the low returns offered by cash over this period led to... low returns. For 8 of the 10 years from 2010 through 2020, holding cash underperformed both U.S. stocks and U.S. Treasuries. And while cash is often like stocks and bonds over time, the returns to holding cash since 2010 were historically bad. But that's now changing, because cash no longer yields nothing. As central banks have raced to raise rates in the face of high inflation, the return on holding cash or near cash investments has jumped materially. One year ago, a 6 month U.S. Treasury bill yielded 0.04%. It now yields 3.25%. That is 3.25% for an investment with very low volatility backed by the full faith and credit of the U.S. government. That's a higher yield than a U.S. 10 year Treasury bond. It is more than double the dividend yield of the S&P 500 stock index. And it's just a quarter of a percentage point less than the dividend yield on U.S. real estate investment trusts. It's important to note that not all short term liquid investments are created equal. While six month U.S. T-bills now yield 3.25%, the average yield on 6 month bank CD's is less than 1%, and the average U.S. savings account yields just 0.2%. In other words, it pays to shop around. And for those in the business of managing money market and liquidity funds, we think this is a good time to add value and grow assets. What are the market implications? For equity markets, if investors can now receive higher yields on low risk cash, we think it's reasonable to think that that should lead investors to ask for higher returns elsewhere, which should lower valuations on stocks. My colleague Michael Wilson, Morgan Stanley's Chief Investment Officer and Chief U.S. Equity Strategist, sees poor risk reward for U.S. equities at current levels. More broadly, we think it supports holding more U.S. dollar cash in a portfolio. That's true for U.S. investors, but also globally, as we forecast the U.S. dollar to continue to strengthen. Holding cash isn't necessarily a sign of caution, it may simply be efficient allocation to an asset that has recently seen a major jump in yield. 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.