Why the stock-market rally may be nothing more than ‘wishful thinking,’ according to Morgan Stanley CIO
Listen to the bond market.
That is the advice from Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warning that recent resilience in stocks could be “nothing more than a bear-market rally, fueled by wishful thinking and excess liquidity,” in a Wednesday client note.
“After a volatile first quarter, U.S. stock and bond markets have been telling differing stories,” she said, pointing to continuing steep losses in the Treasury TMUBMUSD10Y,
That contrasts with the S&P 500 index’s SPX,
The Nasdaq Composite Index COMP,
The resilience, Shalett argued, may reflect an overconfidence in the Federal Reserve’s ability to engineer a “soft landing” for the economy, as it seeks to dramatically tighten financial conditions, including its plans to swiftly shrink its balance sheet.
“Such aggressive tightening will make the Fed’s policy execution highly complex, and historical examples suggest that even when the central bank does manage to land the economy softly, markets often feel a much harder impact,” she wrote.
See: Yellen says not impossible for Fed to engineer soft landing for U.S. economy
Perhaps stock-market investors could be also dismissing the longer-term prospect of rising “real” interest rates, and other potential headwinds from Russia’s war in Ukraine, including the threat of a U.S. economic slowdown or recession in Europe.
Instead, Shalett thinks “more cautious signals coming from the bond market may better reflect the likely path ahead.”
After quickly climbing to the highest since early 2019, the 10-year Treasury yield eased back slightly to 2.688% on Wednesday.
“We look for risks to get more rationally priced and believe investors should watch earnings-revision trends for confirmation that index-level and mega-cap tech profits aren’t immune to the forces of reality,” Shalett said.
