Will the weakness at the end of last year continue this year?
Mike Wilson, Chief Investment Officer and Chief U.S. equity strategist Mike Wilson, our Chief Investment Officer and Chief U.S. equity strategist, explains whether US stocks decline at the end of the year and whether pro-market policies will change future scenarios. Listen to this episode in English. (https://mgstnly.lnk.to/JYdMGl)
Welcome to the transcript “Thoughts on the Market.” This podcast brings you Morgan Stanley’s thoughts on recent financial market trends. Mike Wilson, Chief Investment Officer and U.S. Chief Equity Strategist Today, Mike Wilson, Chief Investment Officer and U.S. Chief Equity Strategist, explains the year-end weakness and the outlook for 25 years that follows. This episode was recorded in New York on January 6th. If you would like to listen to it in English, please click on the URL listed in the description section. The US stock market was strong for 24 years, with the exception in December. There are several possible reasons why it felt weak at the end of the year. First, the stock market had a very strong three months from September to the end of November, and was also the pinnacle of a historic one- and two-year growth. The stock price rise was a result of multiple events that overlapped with multiple events, including a reversal of concerns about a recession in the summer, the Fed’s decision to cut a significant interest rate of 50 basis points, and the Republicans won a landslide election and the hedge cover was covered in early December. Our company said in October that if the elections are overwhelming, the S&P 500 could rise to 6,100, which is consistent with our view. Second, long-term interest rates have risen considerably since the summer, when recession concerns reached its peak. The key point is that 10-year U.S. Treasury yields rose 100 basis points during the period when the Fed cut interest rates by 100 basis points. I think the bond market is probably questioning the Fed’s decision to cut interest rates so aggressively as employment data stabilizes. It is also important that Term Premium has risen by 77 basis points from its lowest level in September, which appears to be the result of this uncertainty about environmental and fiscal sustainability. The stock market began to pay attention as the change in term premiums goes well beyond 50 basis points, saying two months ago that valuations could drop. And in fact, stock multiples reached their peak around early to mid-December, when term premiums exceeded this threshold. Third, rising interest rates and Trump’s victory in the election have led to the dollar rising, reaching levels that could be a hindrance for stocks with a high proportion of non-US revenue. Specifically, the US dollar’s rise has rapidly approached 10% year-on-year, a level that has historically hampered profit growth and guidance for S&P 500 companies. All of these factors have been overlapping and worsening Market Bredos, and it seems Bredos is still giving warnings. It is rare that the difference between the 200-day moving average deviation rate for the S&P 500 index and the ratio of S&P 500 companies exceeding the 200-day moving average is widened. This difference is reduced as Bredos improves or as the S&P 500 index approaches its 200-day moving average, with the S&P 500 index 200-day moving average being 10% lower than its current price. The first scenario can be said to depend on lower interest rates, weaker dollars, clarification of tariff policies, and improved trends in earnings forecast revisions. Unless we continue to move like this, 2025 will probably be different between the first and second half of the year, with the first half going even harder, and we expect that the market-oriented policy changes will achieve the expected results in the second half. Another thing to note is that in recent years the difference between index prices and Bredos has become less likely to shrink compared to before, and this is likely due to the fact that the Ministry of Finance and the Fed supply a wealth of liquidity. Interventions by central banks from other countries also help. The year-over-year rate of dollar-based global money supply has been found to be a good way to monitor important inflection points, if not a perfect measure of judgment, this standard has recently been inverted again. Recent trends in the interest rates and US dollars are one reason why we are so particular about high quality stocks. The reason we place importance on high quality is that we recognize that it is currently at the end of the cycle, and the end of the cycle is a typical environment in which high quality stocks outperform, and the trend towards revisions to earnings forecasts for high quality stocks is becoming relatively strong. As long as this situation continues, it would be reasonable to select stocks among economically sensitive stocks and focus on areas where the relative strength of the revised profit forecast trend can be clearly seen. This includes software, finance, and media entertainment. Thank you for listening to it until the end. We hope you enjoyed Thoughts on the Market again this time, “Reading the Wind of the Market”? If you would like, we would be happy to share this program with friends and colleagues.
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