Bullish investors have celebrated as the S&P 500 Index (SPX) has ascended to yet another record high in recent days and posted a robust 18.7% year-to-date gain through yesterday's close. But to Morgan Stanley, it's a signal of escalating risk and time to take profits in stocks, both U.S. and international, according to Andrew Sheets, chief cross assets strategist at the firm. He has reduced the firm's recommended allocation to global stocks from equal weight to underweight, based on the projection that major global stock market indexes have an average upside of only about 1%, dividends included, according to a Barron's story on Sheets' forecast, as detailed below.
"We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns,” Sheets wrote this week in a note to clients. Mike Wilson, chief U.S. equity strategist and chief investment officer (CIO) at Morgan Stanley, has an even more downbeat view. His bull case foresees a gain of less than 1% for the S&P 500 through mid-2020, and his base case projects a 7.6% loss, per a recent Weekly Warm Up report.
The table below summarizes Morgan Stanley's outlook.
Sheets bases his recommendation on Morgan Stanley's price targets, dividends included, for the S&P 500, MSCI Europe, MSCI Emerging Markets, and the Tokyo Price Index (TOPIX). The simple unweighted average of Morgan Stanley's projected total returns for these indexes over the next 12 months is negligible, as noted above.
“Global inflation expectations, commodity prices and long-end yields suggest little optimism about a growth recovery,” Sheets wrote. “On the back of the G20 [meeting], our economists downgraded their global growth forecasts. We forecast an aggressive Fed and ECB action because we think growth concerns are material," he added. But looser monetary policy by central banks may not be enough to halt a slowdown. “Easing has worked best when accompanied by improving [economic] data," Sheets asserted.
A similarly bearish view about the economy and stocks was issued this week by another colleague of Sheets at Morgan Stanley, Lisa Shalett, chief investment officer for the firm's wealth management division. "Economic data is deteriorating at a faster rate than prior to the 2015-2016 minirecession. Trade policy has become a drag on growth, and resulting earnings weakness could be compounded if the cash flow fueling buybacks is impaired," she writes in the latest edition of The GIC Weekly, from the global investment committee at Morgan Stanley.
"Radical divergence from the fundamentals is rarely sustainable," Shalett warns, with respect to a surging S&P 500 in the face deteriorating economic data. Historical patterns, meanwhile, were raised as an additional concern by Sheets. “July 13-October 12 has historically been the worst 90-day period for equity returns since 1990, possibly because liquidity and risk appetite tend to worsen after 2Q results,” Sheets indicated. “And given high expectations of central bank easing, and a number of geopolitical uncertainties, the risk that poor liquidity magnifies bad news seems credible.”
Shalett recommends that investors take profits in U.S. stocks and bonds, then "rebalance toward asset classes offering valuation and yield support." For capital appreciation, her team prefers real assets, such as commodities.
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