Morgan Stanley Predicts Short-Term Equity Performance Post-Fed Meeting
In a recent note, Morgan Stanley strategists discussed the impact of the Federal Reserve's recent rate cut on equity markets. They believed that a 50bp rate cut by the Fed would be the best short-term scenario for equities, without causing concerns about economic growth. Following the Fed meeting, Fed Chair Jerome Powell managed to strike this balance, leading to a positive response in equity markets.
Looking ahead, the strategists emphasized that over the next 3-6 months, labor data will play a crucial role in driving equity performance at both the index and sector/factor levels. They suggested that an upside surprise in the upcoming employment data would be needed to spark a sustainable cyclical rotation in the U.S. market.
In addition to labor data, the strategists are keeping a close eye on various indicators to assess the growth trajectory. They are particularly focused on earnings revisions breadth, ISM Manufacturing PMI, the Conference Board’s Leading Economic Indicator, and Employment Trends Index.
Overall, the data suggests that investors should focus on high-quality assets and stay cautious, despite recent policy stimulus in China. The strategists also highlighted concerns over the August budget deficit exceeding forecasts and the impact of deficit-driven fiscal stimulus on the private economy.
In this environment, safe-haven assets like gold have outperformed, while lower-quality assets like small-cap stocks and commodities have underperformed. To reverse these trends, either private sector growth must reaccelerate or a recession could reset prices.
In conclusion, while the Fed's rate cut may stabilize lower-quality cyclical stocks in the short term, sustained growth will depend on improved labor data and other growth indicators. A soft landing scenario with growth reaccelerating, inflation stabilizing, and further rate cuts from the Fed could support continued market performance.
Analysis:
- Fed's rate cut has positive short-term impact on equities
- Labor data crucial for future equity performance
- Focus on high-quality assets amid concerns over fiscal sustainability
- Safe-haven assets outperforming, while lower-quality assets underperforming
- Continued growth depends on improved indicators and Fed's actions.
