I am meeting in the next few days with one of the four greatest art forgers in history on a tropical island in Asia. I’m there for 36 hours. Big announcement when I get back next week. Watch this space.
Morgan Stanley warns on growing risk of US market ‘downturn’. Wall Street bank’s market cycle gauge shifts from ‘expansion’ for first time since 2007.
The US market cycle has shifted from an expansionary phase to a “downturn” for the first time since 2007, according to a new report from Morgan Stanley that underscores deepening investor concern over the world economic and political landscape. Morgan Stanley said the decline of its cyclical indicator adds to “a litany of downside risks we see for the markets.” The Wall Street bank cautioned that a “phase-change” in its gauge has typically pointed to “higher chances of recession or a bear market.”
The report from Morgan Stanley, sent to clients late on Sunday, comes after global equity markets finished May with the heaviest losses since the global market ructions at the end of last year. America’s benchmark S&P 500 index dropped 6.6 per cent. In contrast, investors piled into US sovereign bonds, which are widely seen as ‘haven’ assets. Treasuries generated total returns of 2.4 per cent in May, the largest return since January 2015, according to the Barclays index tracking the debt.
Morgan Stanley described the turn in the bank’s cyclical indicator as a “big deal.” It implies worse forward returns for equities and credit, and the need to stay vigilant about rotation opportunities. Signs of a downturn reinforce Morgan Stanley’s “defensive” positioning, with an underweight in US equities and an overweight in Treasuries and cash. Emerging market assets and high-yield credit — corporate bonds that carry speculative-grade ratings — tend to underperform during periods of downturn.
With the cycle indicator in ‘downturn’, together with still-rich valuations and increasing uncertainties about trade tensions, Morgan Stanley reiterate their call for a defensive stance. It generally takes several months for a downturn to materialize after the cyclical measure turns negative. During recent times when the barometer has moved from expansion to downturn, it has taken time for “optimal” allocations to shift, with stocks outside of the US weathering the change better than their American counterparts.
Morgan Stanley thinks that this is consistent with their current equal-weight in global equities and small underweight in US stocks; as ‘downturn’ wears on, they may look to cut risk further. The turn round in Morgan Stanley’s cyclical measure was “driven by US data that are still generally above average but deteriorating.” The index tracks a wide range of factors, including the shape of the yield curve, consumer confidence, bond issuance and employment data.
Data improvement or deterioration needs to be broad-based and persistent — Morgan Stanley only calls a turn when more than 60 per cent of indicator components are stronger/weaker compared to six months ago for three months in a row. This rule means that it’s unlikely that the latest ‘downturn’ is a blip — it would take the majority of the indicator components improving on a persistent basis over the next few months to bring their model back to ‘expansion’.
Due to the recession and to save on energy costs, the light at the end of the tunnel will be turned off