Markets have been surprisingly strong of late given the delay in further stimulus in the U.S.. Chief Cross-Asset Strategist Andrew Sheets discusses the potential causes and why a note of caution may be in order for investors.
Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.
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Current Episode Transcript
Welcome to Thoughts On the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, August 14th, at 2 p.m. in London.
I've thought markets were due for a pause over August and September, but so far they've continued to be strong. Two factors are at work here and they're oddly related. One is surprisingly strong economic data and the other is surprisingly little progress on the second round of US fiscal support.
Let's start with the economic data. With the second quarter seeing the largest decline in the economy in American history, there's naturally quite a bit of concern about how fast and sustainable the recovery can be. We've been a little bit worried that, given the sharp improvement in data through July and the renewed rise in COVID-19 cases recently, US data could be set to moderate. But so far, it's remained strong and generally better than expectations.
That’s good news generally, given ongoing worries about the economy. But it's also very helpful, specifically, because many of the cheapest and most unpopular parts of the market are often the most economically sensitive. While it doesn't sound terribly insightful, good news is good news.
But the other oddly supportive development may have been the delay of new fiscal stimulus. I know that sounds funny, given that the original CARES Act was extremely important in preventing an even larger drop in economic activity and that our economic forecasts will be worse if additional fiscal support doesn't pass.
But there's a saying in investing that "it's better to travel than arrive." The anticipation of an event can often be better than the actual thing. Because the new bill hasn't passed yet, the market can still dream about it, and imagine that it'll be even larger and more supportive than it would otherwise have been.
And so here's where the two stories come together. The economic data, for now, has been good. The dream of an even larger fiscal stimulus bill remains alive. Because of these two forces, stock markets are higher, with lower volatility. And because of all that, there's less urgency to strike a deal. "Look at the stock market," a senator might think, "everything is fine."
I don't know what causes this cycle to break, but it doesn't seem like a stable equilibrium. The further that economic stimulus is delayed, the larger impact it will ultimately have on the economy. With many markets now near our price targets for the middle of next year, we're advising investors to reduce, rather than add to, exposure at this juncture.
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