Recent days have seen the S&P 500 breaking record highs on a steady climb. Year-to-date, the index is up around 20%. To most investors, it’s a sign of market strength and a robust economy. But to Morgan Stanley, it signals escalating risk, both in the US and abroad, and an opportune moment to begin taking money off the table.
Andrew Sheets, Morgan Stanley’s chief cross assets strategist, reduced the firm’s recommendation to underweight, projecting that global assets may only have 1% left of upside on average. A projection of 1% doesn’t leave much room for continued optimism. And at the rate at which the broader US market has been accelerating, that 1% roof is closing in fast.
"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 earlier last week to clients. If that sounds pessimistic, the firm’s chief US equity strategist, Mike Wilson, sees even less than 1% growth from now through mid-2020. And that projection is for the bull side. On the bearish side, Wilson projects a -7.6% loss.
Sheets again: “Global inflation expectations, commodity prices and long-end yields suggest little optimism about a growth recovery...On the back of the G20, our economists downgraded their global growth forecasts. We forecast an aggressive Fed and ECB action because we think growth concerns are material."
In short, central banks’ monetary easing might not be sufficient to prevent a slowdown of global economic growth. As Sheets writes, “Easing has worked best when accompanied by improving [economic] data,” a context that’s quite remote from our current economic situation.
Another bearish voice from Morgan Stanley hails from its wealth management division’s chief investment officer, Lisa Shalett. "Economic data is deteriorating at a faster rate than prior to the 2015-2016 mini-recession. 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 The GIC Weekly, from the global investment committee at Morgan Stanley. With the S&P 500 advancing against a backdrop of deteriorating economic fundamentals, Shalett warns that such an advance is “rarely sustainable.”
The period from July to October have been among the worst period of returns since 1990. The reason for this is that both liquidity and appetite for risk tend to dry up after Q2 results. Sheets acknowledges this adding that “given high expectations of central bank easing, and a number of geopolitical uncertainties, the risk that poor liquidity magnifies bad news seems credible.”
So, what does this mean for investors looking ahead? Shalett recommends that now is the time to cash in, take profits, and move risk to assets “offering valuation and yield support.” As far as capital appreciation is concerned, Shalett recommends “real assets” such as commodities.
In our opinion, converting equities to fixed-income assets will not shelter you from the coming inflationary reduction of purchasing power. The world’s central banks seem to understand this, hence their record purchase of gold in 2018, a trend that is expected to continue this year.
We do agree with Shalett’s recommendation of holding real assets. And what better “real asset” to hold than sound money? What better way to hedge against a weakening economy and a falling dollar than by investing in gold and silver for capital preservation and capital appreciation?