Thoughts on the Market

• Where Is the Bottom of the Market?

  Our CIO and Chief U.S. Equity Strategist Mike Wilson probes whether market confidence can return soon as long as tariff policy remains in a state of flux.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing last week’s volatility and what to expect going forward.It's Monday, April 14th at 11:30am in New York.So, let’s get after it.What a month for equity markets, and it's only halfway done! Entering April, we were much more focused on growth risks than inflation risks given the headwinds from AI Capex growth deceleration, fiscal slowing, DOGE and immigration enforcement. Tariffs were the final headwind to face, and while most investors' confidence was low about how Liberation Day would play out, positioning skewed more toward potential relief than disappointment.That combination proved to be problematic when the details of the reciprocal tariffs were announced on April 2nd. From that afternoon's highs, S&P 500 futures plunged by 16.5 per cent into Monday morning. Remarkably, no circuit breakers were triggered, and markets functioned very well during this extreme stress. However, we did observe some forced selling as Treasuries, gold and defensive stocks were all down last Monday. In my view, Monday was a classic capitulation day on heavy volume. In fact, I would go as far as to say that Monday will likely prove to be the momentum low for this correction that began back in December for most stocks; and as far back as a year ago for many cyclicals. This also means that we likely retest or break last week's price lows for the major indices even if some individual stocks have bottomed. We suspect a more durable low will come as early as next month or over the summer as earnings are adjusted lower, and multiples remain volatile with a downward bias given the Fed's apprehension to cut rates – or provide additional liquidity unless credit or funding markets become unstable. As discussed last week, markets are now contemplating a much higher risk of recession than normal – with tariffs acting as another blow to an economy that was already weakening from the numerous headwinds; not to mention the fact that most of the private economy has been struggling for the better part of two years. In my view, there have been three factors supporting headline GDP growth and labor markets: government spending, consumer services and AI Capex – and all three are now slowing.The tricky thing here is that the tariff impact is a moving target. The question is whether the damage to confidence can recover. As already noted, markets moved ahead of the fundamentals; and markets have once again done a better job than the consensus in predicting the slowdown that is now appearing in the data. While everyone can see the deterioration in the S&P 500 and other popular indices, the internals of the equity market have been even clearer. First, small caps versus large caps have been in a distinct downtrend for the past four years. This is the quality trade in a nutshell which has worked so well for reasons we have been citing for years — things like the k-economy and crowding out by government spending that has kept the headline economic statistics higher than they would have been otherwise. This strength has encouraged the Fed to maintain interest rates higher than the weaker cohorts of the economy need to recover. Therefore, until interest rates come down, this bifurcated economy and equity markets are likely to persist. This also explains why we had a brief, yet powerful rally last fall in low quality cyclicals when the Fed was cutting rates, and why it quickly failed when the Fed paused in December. The dramatic correction in cyclical stocks and small caps is well advanced not only in price, but also in time. While many have only recently become concerned about the growth slowdown, the market began pricing it a year ago.Looking at the drawdown of stocks more broadly also paints a picture that suggests the market correction is well advanced, but probably not complete if we end up in a recession or the fear of one gets more fully priced. This remains the key question for stock investors, in my view, and why the S&P 500 is likely to remain in a range of 5000-5500 and volatile – until we have a more definitive answer to this specific question around recession, or the Fed decides to circumvent the growth risks more aggressively, like last fall.With the Fed saying it is constrained by inflation risks, it appears likely to err on the side of remaining on hold despite elevated recession risk. It's a similar performance story at the sector and industry level, with many cohorts experiencing a drawdown equal to 2022. Bottom line, we've experienced a lot of price damage, but it's too early to conclude that the durable lows are in – with policy uncertainty persisting, earnings revisions in a downtrend, the Fed on hold and back-end rates elevated. While it’s too late to sell many individual stocks at this point, focus on adding risk over the next month or two as markets likely re-test last week’s lows. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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  5:23
• Is the Market Rebound a Mirage?

  Our Head of Corporate Credit Research analyzes the market response to President Trump’s tariff reversal and explains why rallies do not always indicate an improvement in the overall environment.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about the historic gains we saw this week in markets, and what they may or may not tell us. It's Friday April 11th at 2pm in London. Wednesday saw the S&P 500 gain 9.5 percent. It was the 10th best day for the U.S. equity market in the last century. Which raises a reasonable question: Is that a good thing? Do large one-day gains suggest further strength ahead – or something else? This is the type of Research question we love digging into. Pulling together the data, it’s pretty straightforward to sort through those other banner days in stock market history going back to 1925. And what they show is notable. I’m now going to read to you when those large gains occurred, in order of the gains themselves. The best day in market history, March 15th 1933, when stocks soared over 16 per cent? It happened during the Great Depression. The 2nd best day, Oct 30th 1929. During the Great Depression. The 3rd best day – Great Depression. The fourth best – the first trading day after Germany invaded Poland in 1939 and World War 2 began. The 5th best day – Great Depression. The 6th Best – October 2008, during the Financial Crisis. The 7th Best – also during the Financial Crisis. The 8th best. The Great Depression again. The 9th best – The Great Depression. And 10th best? Well, that was Wednesday. We are in interesting company, to say the least. Incidentally, we stop here in the interest of brevity; this is a podcast known for being sharp and to the point. But if we kept moving further down the list, the next best 20 days in history all happen during either COVID, the 1987 Crash, a Recession, or a Depression. So why would that be? Why, factually, have some of the best days in market history occurred during some of the very worst of possible backdrops. In some cases, it really was a sign of a buying opportunity. As terrible as the Great Depression was – and as the grandson of a South Dakota farmer I heard the tales – stocks were very cheap at this time, and there were some very large rallies in 1932, 1933, or even 1929. During COVID, the gains on March 24th of 2020, which were associated with major stimulus, represented the major market low. But it can also be the case that during difficult environments, investors are cautious. And they are ultimately right to be cautious. But because of that fear, any good news – any spark of hope – can cause an outsized reaction. But it also sometimes doesn't change that overall challenging picture. And then reverses. Those two large rallies that happened in October of 2008 during the Global Financial Crisis, well they both happened around hopes of government and central bank support. And that temporarily lifted the market – but it didn’t shift the overall picture. What does this mean for investors? On average, markets are roughly unchanged in the three months following some of these largest historical gains. But the range of what happens next is very wide. It is a sign, we think, that these are not normal times, and that the range of outcomes, unfortunately, has become larger. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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  4:00
• Why Tariffs Spurred a Dash for Cash

  Our analysts Vishy Tirupattur and Martin Tobias explain how the announcement of new tariffs and the subsequent pause in their implementation affected the bond market.Read more insights from Morgan Stanley. ---- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's, Chief Fixed Income Strategist.Martin Tobias: And I'm Martin Tobias, from the U.S. Interest Rate Strategy Team.Vishy Tirupattur: Yesterday the U.S. stock market shot up quite dramatically after President Trump paused most tariffs for 90 days. But before that, there were some stresses in the funding markets. So today we will dig into what those stresses were, and what transpired, and what investors can expect going forward.It's Thursday, April 10th at 11:30am in New York.President Trump's Liberation Day tariff announcements led to a steep sell off in the global stock markets. Marty, before we dig into that, can you give us some Funding Markets 101? We hear a lot about terms like SOFR, effective fed funds rate, the spread between the two. What are these things and why should we care about this?Martin Tobias: For starters, SOFR is the secured overnight financing rate, and the effective fed funds rate – EFFR – are both at the heart of funding markets.Let's start with what our listeners are most likely familiar with – the effective fed funds rate. It's the main policy rate of the Federal Reserve. It's calculated as a volume weighted median of overnight unsecured loans in the Fed funds market. But volume in the Fed funds market has only averaged [$]95 billion per day over the past year.SOFR is the most important reference rate for market participants. It's a broad measure of the cost to borrow cash overnight, collateralized by Treasury securities. It's calculated as a volume weighted median that covers three segments of the repo market. Now SOFR volumes have averaged 2.2 trillion per day over the past year.Vishy Tirupattur: So, what you're telling me, Marty, is that the, the difference between these two rates really reflects how much liquidity stress is there, or the expectations of the uncertainty of funding uncertainty that exists in the market. Is that fair?Martin Tobias: That's correct. And to do this, investors look at futures contracts on fed funds and SOFR.Now fed funds futures reflect market expectations for the Fed's policy rate, SOFR futures reflect market expectations for the Fed policy rate, and market expectations for funding conditions. So, the difference or basis between the two contracts, isolates market expectations for funding conditions.Vishy Tirupattur: So, this basis that you just described. What is the normal sense of this? Where [or] how many basis points is the typical basis? Is it positive? Is it negative?Martin Tobias: In a normal environment over the past three years when reserves were in Abundancy, the three-month SOFR Fed funds Futures basis was positive 2 basis points. This reflected SOFR to set 2 basis points below fed funds on average over the next three months.Vishy Tirupattur: So, what happened earlier this week is – SOFR was setting above effective hedge advance rate, implying…Martin Tobias: Implying tighter funding conditions.Vishy Tirupattur: So, Marty, what actually changed yesterday? How bad did it get and why did it get so bad?Martin Tobias: So, three months SOR Fed funds tightened all the way to -4 basis points. And we think this was a reflection of investors’ increased demand for cash; whether it was lending more securities outright in repo to raise cash, or selling securities outright, or even not lending excess cash in repo. This caused dealer balance sheets [to] become more congested and contributed to higher SOFR rates.Vishy Tirupattur: So, let's give some context to our listeners. So, this is clearly not the first time we've experienced stress in the funding markets. So, in previous episodes – how far did it get and gimme some context.Martin Tobias: Funding conditions did indeed tighten this week, but the environment was far from true funding stress like in 2019 and certain periods in 2020. Now, in 2019 when funding markets seized, and the Fed had to intervene and inject liquidity, three months SOFR fed funds basis averaged -9 basis points. And that compares to -4 basis points during the peak macro uncertainty this week.Vishy Tirupattur: So, Marty, what is your assessment of the state of the funding markets right now?Martin Tobias: Right. Funding conditions have tightened, but I think the environment is far from true funding stress. Thus far, the repricing has occurred because of a higher floor for funding rates and not a scarcity of reserves in the banking system.Vishy Tirupattur: So, to summarize, so the funding stress has been quite a bit earlier this week. Not as bad as the worst conditions we saw say in 2019 or during the peak COVID periods in 2020. but still pretty bad. And relative to how bad it got, today we are slightly better than what we were two days ago. Is that a fair description?Martin Tobias: Yes. That's good. Now, Vishy, what is your view on why the longer end of the bond market sold off.Vishy Tirupattur: So longer end bond markets, as you know, Marty, while safe from a credit risk perspective, do have interest rate sensitivity. So, the longer the bonds, the greater the interest rate sensitivity. So, in periods of uncertainty, such as the ones we are in now, investors prefer to be in ultra short-term funds or cash – to minimize that interest rate sensitivity of their portfolios. So, what we saw happening in some sense, we can call it dash for cash.I think we both agree that this demand for safety will persist, and we will continue to see inflows into money market funds, which you covered in your research. So, your insights Marty will be very helpful to clients as we navigate these choppy waters going forward.Thanks a lot, Marty, for joining this webcast today.Martin Tobias: Great speaking with you, Vishy,Vishy Tirupattur: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.DisclaimerVishy Tirupattur: Yesterday all my troubles were so far away. I believe in yesterday.

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  6:33
• Lingering Uncertainties After Tariff Reprieve

  Earlier today, President Trump announced a pause on reciprocal tariffs for 90 days. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas looks at the fallout.----- Transcript ----- Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today – possible outcomes of President Trump's sudden pause on reciprocal tariffs.It’s Wednesday, April 9th, at 10pm in New York. We’d actually planned a different episode for release today where my colleague Global Chief Economist Seth Carpenter and I laid out developments in the market thus far and looked at different sets of potential outcomes. Needless to say, all of that changed after President Trump announced a 90-day pause on most tariffs that were set to rise. And so, we needed to update our thinking.It's been a truly unprecedented week for financial markets. The volatility started on April 2, with President Trump’s announcement that new, reciprocal tariffs would take effect on April 9. When added to already announced tariffs, and later adding even more tariffs in for China, it all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years. Understandably, equity markets sold off in a volatile fashion, reflecting investor concerns that the US was committed to retrenching from global trade – inviting recession and an economic future with less potential growth. The bond market also showed signs of considerable strain. Instead of yields falling to reflect growth concerns, they started rising and market liquidity weakened. The exact rationale is still hard to pin down, but needless to say the combined equity and bond market behavior was not a healthy situation.Then, a reprieve. President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress. And though he would keep China tariffs at levels over 100 per cent, the announcement was enough to boost equity markets, with S&P gaining around 9 per cent on the day.So, what does it all mean? We’re still sorting it out for ourselves, but here’s some initial takeaways and questions we think will be important to answer in the coming days.First, there's still plenty of lingering uncertainties to deal with, and so investors can’t put US policy risk behind them. Will this 90 day reprieve hold? Or just delay inevitable tariff escalation? And even if the reprieve holds, do markets still need to price in slower economic growth and higher recession risk? After all, US tariff levels are still considerably higher than they were a week ago. And the experience of this market selloff and rapid shifts in economic policy may have impacted consumer and business confidence. In my travels this week I spent considerable time with corporate leaders who were struggling to figure out how to make strategic decisions amidst this uncertainty. So we’ll need to watch measures of confidence carefully in the coming weeks. One signal amidst the noise is about China, specifically that the US’ desire to improve supply chain security and reduce goods trade deficit would make for difficult negotiation with China and, ultimately, higher tariffs that would stay on for longer relative to other countries. That appears to be playing out here, albeit faster and more severely than we anticipated. So even if tariff relief is durable for the rest of the world, the trade relationship with China should be strained. And that will continue to weigh on markets, where costs to rewire supply chains around this situation could weigh on key sectors like tech hardware and consumer goods. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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  3:54
• Three Things That Could Ease Tariff Jitters

  Our CIO and Chief U.S. Equity Strategist explains why the new tariffs added momentum to a correction that was already underway, and what could ease the fallout in equity markets.Read more insights from Morgan Stanley. ---- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing equity market reactions to the tariffs and what to expect from here. It's Tuesday, April 8th at 11:30am in New York.So, let's get after it. From our perspective, last week's Liberation Day was more like the cherry on top for a market that had been dealing with multiple headwinds to growth all year, rather than the beginning. While the magnitude of the tariffs turned out to be worse than our public policy team's base line expectations, the price reaction appears capitulatory to us given that many stocks were already down 30 to 40 percent before the announcement on Wednesday. As discussed in last week’s podcast, our 5500 first half support level on the S&P 500 quickly gave way given this worse than expected outcome for tariffs. The price action since then has forced us to consider new technical support levels which could be as low as the 200-week moving average. And that would be 4700 on the S&P 500. I think it’s worth highlighting that cyclical stocks started underperforming in April of last year and are now down more than 40 percent relative to defensive stocks. In other words, markets have been telling us for almost a year that growth was going to slow, and since January, it's been telling us it's going to slow significantly. In fact, cyclicals have underperformed defensives to a degree only seen during a recession, not prior to them. This fits very nicely with our long-standing view that most of the private economy has been much weaker than the headline numbers suggest – thanks to unprecedented fiscal spending, AI capex and wealthy consumers spending their gains from asset prices. With the exceptional fourth quarter surge in U.S. fiscal spending likely to decline even without DOGE's efforts, global growth impulses will suffer too. Hence, foreign stocks are unlikely to provide much of a safe haven if the U.S. goes on a diet or detox from fiscal spending. Markets began to contemplate such an outcome with last week’s announcements. Therefore, I remain of the view we discussed two weeks ago that U.S. equities should trade better than foreign ones going forward. That is especially the case with China, Europe and Japan all which run big current account surpluses and are more vulnerable to weaker trade.Meanwhile, the headline numbers on employment and GDP have been flattered by government related jobs and the hiring of immigrants at below market wages. This is one reason the Fed has kept rates higher than many businesses and consumers need and why we remain in an economy of haves and have-nots. Our long standing thesis is that the government has been crowding out much of the economy since COVID, and arguably since the Great Financial Crisis. It's also why large cap quality has been such a consistent outperformer since the end of 2021 and why we have continued to have high conviction and our recommendation are overweight these factors despite short periods of outperformance by low quality cyclicals or small caps – like last fall when the Fed was cutting rates and we pivoted briefly to a more pro-cyclical recommendation. Bottom line, equity markets are discounting machines and they trade six months in advance of the headlines. With most stocks topping in December of last year and cyclicals’ relative performance peaking almost a year ago, this correction is well advanced, and this is not the time to be selling. However, it's fair to say that the tariff announcements last week have taken us to an area with greater tail risk that includes a recession or financial contagion that must be taken into consideration when thinking about levels and adding risk.I see three specific scenarios that could put in a durable floor more quickly:1. President Trump delays the effective date for the implementation of the additional tariffs beyond the initial 10 percent that went into effect this weekend2. The Fed offers support for markets, either explicitly or verbally3. A number of nations come to the table and negotiate on favorable terms to the United States.In short, get ready for another bumpy week and remember markets are looking much further ahead than today’s headline. I remain optimistic that the second half will be better than the first as these growth negative policies morph into growth positive ones via de-regulation, a better fiscal trajectory, lower interest rates and taxes and maybe even higher wages for the American consumer.Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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  4:39

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