Morgan Stanley Warns About an ‘Uncertain Macro Backdrop’
The US economy is currently navigating through a phase of mixed signals, which has led to fluctuations in both the stock and bond markets. Morgan Stanley’s team of strategists recently highlighted the ongoing uncertainty affecting the market’s direction. According to them, the market is caught in a pendulum swing, alternating between forecasting a “soft landing” and bracing for a “no landing” scenario in the prevailing late-cycle economic environment.
This indecision is fueled by the continued delivery of mixed macroeconomic data, illustrated vividly by last week’s market movement. Notably, data releases such as the Employment Cost Index and the price components of the ISM Manufacturing and Services indices exceeded expectations. This was in contrast to other indicators like the Nonfarm Payroll (NFP) report, the Conference Board Consumer Confidence index, and the general ISM readings, which all failed to meet forecasts.
In light of these developments, Morgan Stanley strategists advocate for a balanced investment strategy. “Given the unsure environment, adopting an investment strategy that performs well across different market outcomes is advisable. We recommend a combination of quality cyclicals, expected to outshine in a ‘no landing’ scenario, alongside quality growth, which is likely to prevail in a ‘soft landing’ scenario,” they explained.
Regarding recent monetary policy, the Federal Open Market Committee (FOMC) meeting aligned with expectations. The statement by Chair Powell indicated a diminished certainty regarding the timing of the anticipated rate cut, influenced by the latest inflation data. However, the possibility of an immediate rate increase was firmly denied. All eyes are now trained on the April Consumer Price Index (CPI) report, set for release on May 15, as it will play a pivotal role in shaping future monetary policy directions.
The consumption dynamics within the economy portray a dichotomy, with robust spending at the higher end of the income spectrum contrasted by retrenchment among lower-income groups. As more consumers opt for less expensive alternatives, businesses are adapting by accentuating “value.” This emphasis on value has become a prevalent theme in Consumer Discretionary earnings calls, as noted by Morgan Stanley, with such mentions reaching an all-time high. Interestingly, the subsequent stock performance in this sector has remained in line with the overall sector average.
Finally, strategists at Morgan Stanley see potential in Consumer Staples as a sector likely to gain from a shift away from discretionary spending. “The recent upward trend in earnings revisions for Consumer Staples compared to Consumer Discretionary suggests a promising outlook for relative performance moving forward. Given the current economic cycle and the prevailing consumer trends, a preference for Staples over Discretionary is a prudent choice,” they concluded.
