Morgan Stanley's Wilson on Stocks, Fed, Inflation

Summary

The video script discusses the recent market correction and its causes, including equity market shocks and carry trade unwinds. It suggests that consumer spending is slowing down, affecting both goods and services companies. The script highlights the challenges of market recovery due to slowing growth and high earnings expectations. It also touches on the Federal Reserve's cautious approach to rate cuts and the potential impact on consumer sentiment. The discussion emphasizes the importance of defensive strategies and the risks associated with high market valuations and leverage.

Takeaways

• 📉 The market correction was unexpected and has occurred immediately, with various reasons contributing to the situation.
• 🔄 The speaker anticipates a period of stagnation within a certain market range due to recent events.
• 💹 There was a significant shock beyond the equity market correction, including the unwinding of carry trades, causing discomfort among some investors.
• 🛑 The consumer slowdown is a key concern, affecting not only goods companies but also consumer services, which needs to be addressed.
• 📈 For markets to reach new highs, multiple expansion is necessary, which is challenging in a slowing growth environment with high earnings expectations.
• 🤔 The Federal Reserve's reluctance to be proactive and its data-dependent approach is criticized but also defended as a responsible reaction.
• 🗓 The possibility of a rate cut in September is mentioned, but its impact on consumer behavior is not expected to be immediate.
• 🏠 The housing market is specifically discussed, with the suggestion that a modest rate cut will not significantly affect consumer sentiment or stock performance.
• 📊 There is a focus on stock-level analysis and second-level trades due to the inappropriate market valuation, with a fair market multiple suggested to be around 19 times earnings in a soft landing scenario.
• 📉 High levels of equity leverage in the system are a concern, with the potential for further market shocks if not addressed.
• 📊 Earnings expectations for the second half of the year are expected to be weaker, with tough comparisons from the previous year and a possible lack of order book growth.
• 📉 The connection between inflation expectations and stock performance is highlighted, with lower inflation potentially being bad news for stocks due to reduced pricing power.

Q & A

What is the general view on the recent market correction?

The general view is that the market will likely be stuck in a range after the recent correction, partly due to the big shock not only in equity markets but also in the carry trade.

Why might it be challenging for markets to reach new highs?

It could be challenging for markets to reach new highs because growth is slowing, earnings expectations might still be too high, and the Federal Reserve is reluctant to be proactive.

What is the speaker's perspective on the Federal Reserve's actions?

The speaker believes the Federal Reserve is being data-dependent and will react if necessary. Overreacting could exacerbate problems, particularly with the carry trade.

What impact could the current high interest rates have on consumers?

High interest rates could cause more pain for consumers, which might be underappreciated by investors. The effects of rate cuts are delayed and won't immediately stimulate consumer spending.

Why is the speaker underweight in consumer discretionary stocks?

The speaker is underweight in consumer discretionary stocks and overweight in later-cycle groups and defensives because of the belief that consumer sentiment and spending will continue to be negatively impacted by high interest rates and other economic factors.

What is the concern about the current positioning in the Nasdaq 100?

There is concern that the Nasdaq 100 is still vulnerable due to the $22.5 billion of long positioning, making it susceptible to any sentiment shocks.

What is the speaker's view on market valuation?

The speaker believes that current market valuations are inappropriate, with the market trading north of 20 times earnings, which is considered high. A more appropriate valuation in a soft landing would be around 19 times.

What role does leverage play in the current market environment?

Leverage is still high in the system, with people taking on more risk. This is concerning because it increases the vulnerability to economic shocks.

Why does the speaker expect earnings to be weaker in the second half of the year?

The speaker expects earnings to be weaker in the second half due to tough comparisons from last year and an elusive pickup in orders. There is skepticism about whether order books will improve in September, which is critical for a reacceleration.

How does the speaker interpret recent inflation data in relation to the stock market?

The speaker suggests that weaker inflation data might be bad news for stocks because it indicates a loss of pricing power for firms. However, it could be good news for bonds and aligns with the speaker's preference for defensive stocks.