Thoughts on the Market

Our head of Corporate Credit Research, Andrew Sheets, notes areas of uncertainty in the credit, equity and macro landscapes that are worth tracking as we move into the fall.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about three risks we’re focused on for the third quarter.It's Friday, July 26th at 2pm in London.We’re like credit. But there are certainly risks we’re watching. I’d like to discuss three that are top of mind. The first is probably the mildest. Looking back over the last 35 years, August and September have historically been tougher months for riskier assets like stocks and corporate bonds. US High Yield bonds, for example, lose about 1 per cent relative to safer government bonds over August-September. That’s hardly a cataclysm, but it still represents the worst two-month stretch of any point of the year. And so all-else-equal, treading a little more cautiously in credit over the next two months has, from a seasonal perspective, made sense. The second risk is probably the most topical. Equity markets, especially US equity markets, are seeing major shifts in which stocks are doing well. Since July 8th, the Nasdaq 100, an index dominated by larger high-quality, often Technology companies, is down over 7 per cent. The Russell 2000, a different index representing smaller, often lower quality companies, is up over 11 per cent. So ask somebody – ‘How is the market?’ – and their answer is probably going to differ based on which market they’re currently in. This so-called rotation in what’s outperforming in the equity market is a risk, as Technology and large-cap equities have outperformed for more than a decade, meaning that they tend to be more widely held. But for credit, we think this risk is pretty modest. The weakness in these Large, Technology companies is having such a large impact because they make up so much of the market – roughly 40 per cent of the S&P 500 index. But those same sectors are only 6 per cent of the Investment grade credit market, which is weighted differently by the amount of debt somebody is issued. Meanwhile, Banks have been one of the best performing sectors of the stock market. And would you believe it? They are one of the largest sectors of credit, representing over 20 per cent of the US Investment Grade index. Put a slightly different way, when thinking about the Credit market, the average stock is going to map much more closely to what’s in our indices than, say, a market-weighted index. The third risk on our minds is the most serious: that economic data ends up being much weaker than we at Morgan Stanley expect. Yes, weaker data could lead the Fed and the ECB to make more interest rate cuts. But history suggests this is usually a bad bargain. When the Fed needs to cut a lot as growth weakens, it is often acting too late. And Credit consistently underperforms.We do worry that the Fed is a bit too confident that it will be able to see softness coming, given the lag that exists between when it cuts rates and the impact on the economy. We also think interest rates are probably higher than they need to be, given that inflation is rapidly falling toward the Fed’s target. But for now, the US Economy is holding up, growing at an impressive 2.8 per cent rate in the second quarter in data announced this week. Good data is good news for credit, in our view. Weaker data would make us worried. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Markets are contending with greater uncertainty around the US presidential election following President Biden’s withdrawal. Our Global Head of Fixed Income and Thematic Research breaks down what we know as the campaign enters a new phase.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the latest development in the US presidential race.It's Thursday, July 25th at 2:30 pm in New York. Last weekend, when President Biden decided not to seek re-election, it begged some questions from investors. First, with a new candidate at the top of the ticket, are there new policy impacts, and potential market effects, resulting from Democrats winning that we haven’t previously considered? For the moment, we think the answer is no. Consider Vice President Harris. Her policy positions are similar to Biden’s on key issues of importance to markets. And even if they weren’t, the details of key legislative policies in a Democratic win scenario will likely be shaped by the party’s elected officials overall. So, our guidance for market impacts that investors should watch for in the event that Democrats win the White House is unchanged. Second, what does it mean for the state of the race? After all, markets in the past couple of weeks began anticipating a stronger possibility of Republican victory. It was visible in stronger performance in small cap stocks, which our equity strategy team credited to investors seeing greater benefits in that sector from more aggressive tax cuts under possible Republican governance. It was also visible in steeper yield curves, which could reflect both weaker growth prospects due to tariff risks, pushing shorter maturity yields lower, and greater long-term uncertainty on economic growth, inflation, and bond supply from higher US deficits – something that could push longer-maturity Treasury yields relatively higher. So, it's understandable that investors could question the durability of these market moves if the race appeared more competitive. But the honest answer here is that it's too early to know how the race has changed. As imperfect as they are, polls are still our best tool to gauge public sentiment. And there’s scant polling on Democratic candidates not named Biden. So, on the question of which candidate more likely enjoys sufficient voter support to win the election, it could be days or weeks before we have reliable information. That said, prediction markets are communicating that they expect the race to tighten – pricing President Trump’s probability of regaining the White House at about 60-65 per cent, down from a recent high of 75-80 per cent. So bottom line, a change in the Democratic ticket hasn’t changed the very real policy stakes in this election. We’ll keep you informed here of how it's impacting our outlook for markets. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Asia Economist explains how the region’s economies and markets would be affected by higher tariffs, and other possible scenarios in the US elections.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a question that’s drawing increasing attention – just how the U.S. presidential election would affect Asian economies and markets. It’s Wednesday, July 24th, at 8 PM in Hong Kong. As the US presidential race progresses, global markets are beginning to evaluate the possibility of a Trump win and maybe even a Republican sweep. Investors are wondering what this would   mean for Asia in particular. We believe there are three channels through which the US election outcome will matter for Asia. First, financial conditions – how the US dollar and rates will move ahead of and after the US elections. Second, tariffs. And third, US growth outcomes, which will affect global growth and end demand for Asian exports. Well, out of the three our top concern is the growth downside from higher tariffs. The 2018 experience suggests that the direct effect of tariffs is not what plays the most dominant role in affecting the macro outcomes; but rather the transmission through corporate confidence, capital expenditure, global demand and financial conditions. Let’s consider two scenarios. First, in a potential Trump win with divided government, China would likely be more affected from tariffs than Asia ex China. We see potentially two outcomes in this scenario – one where the US imposes tariffs only on China, and another where it also imposes 10 percent tariffs on the rest of the world. In the case of 60 percent tariffs on imports from China, there would be meaningful adverse effect on Asia's growth and it will be deflationary. China would remain most exposed compared to the rest of the region, which has reduced its export exposure to China over time and could see a positive offset from diversification of the supply chain away from China. In the case where the US also imposes 10 percent tariffs on imports from the rest of the world, we expect a bigger downside for China and the region. We believe that in this instance – in addition to the direct effect of tariffs on exports – the growth downside will be amplified by significant negative impact on corporate confidence, capex and trade. Corporate confidence will see bigger damage in this instance as compared to the one where tariffs are imposed only on China as corporate sector will have to think about on-shoring rather than continuing with friend-shoring. In the second scenario, in a potential Trump win with Republican sweep, in addition to the implications from tariffs, we would also be watching the possible fiscal policy outcomes and how they would shift the US yields and the dollar. This means that the tightening of financial conditions would pose further growth downside to Asia, over and above the effects of tariffs. How would Asia’s policymakers respond to these scenarios? As tariffs are imposed, we would expect Asian currencies to most likely come under depreciation pressure in the near term. While this helps to partly offset the negative implications of tariffs, it will constraint the ability of the central banks to cut rates. In this context, we expect fiscal easing to lead the first part of the policy response before rate cuts follow once currencies stabilize. It’s worth noting that in this cycle, the monetary policy space in Asia is much more limited than in the previous cycles because nominal rates in Asia for the most part are lower than in the US at the starting point. Of course, this is an evolving situation in the remaining months before the US elections, and we’ll continue to keep you updated on any significant developments. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Head of Global Autos & Shared Mobility discusses what makes humanoid robots a pivotal trend with implications for the global economy.----- Transcript -----Welcome to Thoughts on the Market. I’m Adam Jonas, Morgan Stanley’s Head of Global Autos & Shared Mobility. Today I’ll be talking about an unusual but hotly debated topic: humanoid robots.It’s Tuesday, July 23rd, at 10am in New York. We've seen robots on factory floors, in displays at airports and at trade shows – doing work, performing tasks, even smiling. But over the last eighteen months, we seem to have hit a major inflection point.What's changed? Large Language Models and Generative AI. The current AI movement is drawing comparisons to the dawn of the Internet. It’s begging big, existential questions about the future of the human species and consciousness itself. But let’s look at this in more practical terms and consider why robots are taking on a human shape. The simplest answer is that we live in a world built for humans. And we’re getting to the point where – thanks to GenAI – robots are learning through observation. Not just through rudimentary instruction and rules based heuristic models. GenAI means robots can observe humans in action doing boring, dangerous and repetitive tasks in warehouses, in restaurants or in factories. And in order for these robots to learn and function most effectively, their design needs to be anthropomorphic. Another reason we're bullish on humanoid robots is because developers can have these robots experiment and learn from both simulation and physically in areas where they’re not a serious threat to other humans. You see, many of the enabling technologies driving humanoid robots have come from developments in autonomous cars. The problem with autonomous cars is that you can't train them on public roads without directly involving innocent civilians – pedestrians, children and cyclists -- into that experiment. Add to all of this the issue of critical labor shortages and challenging demographic trends. The global labor total addressable market is around $30 trillion (USD) or about one-third of global GDP. We’ve built a proprietary US total addressable market model examining labor dynamics and humanoid optionality across 831 job classifications, working with our economic team; and built a comprehensive survey across 40 sectors to understand labor intensity and humanoid ability of the workforce over time. In the United States, we forecast 40,000 humanoid units by 2030, 8 million by 2040 and 63 million by 2050 – equivalent to around $3 trillion (USD) of salary equivalent. But as early as 2028 we think you're going to see significant adoption beginning in industries like manufacturing, production, warehousing, and logistics, installation, healthcare and food prep. Then in the 2030s, you’re going to start adding more in healthcare, recreational and transportation. And then after 2040, you may see the adoption of humanoid robots go vertical. Now you might say – that’s 15 years from now. But just like autonomous cars, the end state might be 20 years away, but the capital formation is happening right now. And investors should pay close attention because we think the technological advances will only accelerate from here. Thanks for listening. And if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our CIO and Chief US Equity Strategist explains that in the event of a Republican sweep in this fall’s U.S. elections, investors should not expect a repeat of 2016 given the different business environment.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity  Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about  why investors should fade the recent rally in small caps and other pro cyclical trades. It's Monday, July 22nd at 11:30am in New York.  So let’s get after it.With Donald Trump’s odds of winning a second Presidency rising substantially over the past few weeks, we’ve fielded many questions on how to position for this outcome. In general, there is an increasing view that growth and interest rates could be higher given Trump's focus on business-friendly policies, de-regulation, higher tariffs, less immigration and additional tax cuts.  While the S&P 500 has risen alongside Trump's presidential odds this year, several of the perceived  industry outperformers under this political scenario have only just recently started to show relative outperformance. One could argue a Trump win in conjunction with a Republican sweep could be  particularly beneficial for Banks, Small Caps, Energy Infrastructure and perhaps Industrials. Although, the  Democrats' heavy fiscal spending and subsidies for the Inflation Reduction Act, Chips Act and other infrastructure projects suggest Industrial stocks may not see as much of an incremental benefit relative to the past four years. The  perceived industry underperformers are alternative energy stocks and companies likely to be affected  the most by increased tariffs. Consumer stocks stand out in terms of this latter point, and they have underperformed recently. However, macro factors are likely affecting this dynamic as well. For example, concerns around slowing services demand and an increasingly value-focused consumer have risen, too. It's interesting to note that while these cyclical areas that are perceived to outperform under a Trump Presidency did work in 2016 and through part of 2017, they did even better during Biden's first year. Our rationale on this front is that the cycle plays a larger role in how stocks trade broadly and at the sector level than who is in the White House. As a comparison, we laid out a bullish case at the end of 2016 and in early 2017 when many were less constructive on pro cyclical risk assets than we were post the 2016 election. It’s worth pointing out that the global economy was coming out of a commodity and  manufacturing recession at that time, and growth was just starting to reaccelerate, led by another China boom. Today, we face a much different macro landscape. More specifically, several of the cyclical trades mentioned above typically show their best performance in the early cycle phase of an economic  expansion like 2020-2021. They show strong, but often not quite as strong performance in mid cycle  periods like 2016-17. They tend to show less strong returns later in the cycle like today. Our late cycle view is further supported by the persistent fall in long term interest rates and inverted yield curve.  We believe the recent outperformance of lower quality, small cap stocks has been driven mainly by a combination of softer inflation data and hopes for an earlier Fed cut combined with dealer demand and short covering from investors on the back of Trump’s improved odds. For those looking to the 2016 playbook, we would point out that relative earnings revisions for small cap cyclicals are much weaker today than they were during that period.   Back in December when small caps saw a similar squeeze higher, we explored the combination of factors  that would likely need to be in place for small cap equities to see a durable, multi-month period of  outperformance. Our view was that the introduction of rate cuts in and of itself was not enough of a factor to drive small cap outperformance versus large caps. In fact, history suggests large cap growth tends to be the best performing style once the Fed begins cutting as nominal growth is often slowing at  this point in the cycle, which enables the Fed to begin cutting. We concluded that to see durable small cap  outperformance, we would need to see a much more aggressive Fed cutting cycle that revived animal spirits in a significant enough way for growth and pricing power to inflect higher, not lower like recent trends.  We are monitoring small cap earnings expectations and small business sentiment for signs that animal  spirits are building in this way. Rates and pricing power are still headwinds; while small businesses are not all that sanguine about expanding operations, they are increasingly viewing the economy more  positively — an incremental positive and something worth watching. We will continue to monitor the  data in assessing the feasibility of this small cap rally continuing. Based on the evidence to date, we  would resist the urge to chase this cohort and lean back into large cap quality and defensives. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen, and share  Thoughts on the Market with a friend or colleague today. 

Our Head of Corporate Credit Research shares four reasons that he believes credit spreads are likely to stay near their current lows.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why being negative credit isn’t as obvious as it looks, despite historically low spreads.It's Friday, July 19th at 2pm in London.We’re constructive on credit. We think the asset class likes moderation, and that’s exactly what Morgan Stanley forecasts expect: moderate growth, moderating inflation and moderating policy rates. Corporate activity is also modest; and even though it’s picking up, we haven’t yet seen the really aggressive types of corporate behavior that tend to make bondholders unhappy. Meanwhile, demand for the asset class is strong, and we think the start of Fed rate cuts in September could make it even stronger as money comes out of money market funds, looking to lock in current interest rates for longer in all sorts of bonds – including corporate bonds. And so while spreads are low by historical standards, our call is that helpful fundamentals and demand will keep them low, at least for the time being. But the question of credit’s valuation is important. Indeed, one of the most compelling bearish arguments in credit is pretty straightforward: current spreads are near some of their lowest levels of several prior cycles. They’ve repeatedly struggled to go lower. And if they can’t go lower, positioning for spreads to go wider and for the market to go weaker, well, it would seem like pretty good risk/reward. This is an extremely fair question! But there are four reasons why we think the case to be negative isn’t as straightforward as this logic might otherwise imply.First, a historical quirk of credit valuations is that spreads rarely trade at long-run average. They are often either much wider, in times of stress, or much tighter, in periods of calm. In statistical terms, spreads are bi-modal – and in the mid 1990s or mid 2000’s, they were able to stay near historically tight levels for a pretty extended period of time. Second, work by my colleague Vishwas Patkar and our US Credit Strategy team notes that, if you make some important adjustments to current credit spreads, for things like quality, bond price, and duration, current spreads don’t look quite as rich relative to prior lows. Current investment grade spreads in the US, for example, may still be 20 basis points wider than levels of January 2020, right before the start of COVID. Third, a number of the key buyers of corporate bonds at the moment are being driven by the level of yields, which are still high rather than spread, which are admittedly low. That could mean that demand holds up better even in the face of lower spreads. And fourth, credit is what we’d call a positive carry asset class: sellers lose money if nothing in the market changes. That’s not the case for US Treasuries, or US Equities, where those who are negative – or short – will profit if the market simply moves sideways. It’s one more factor that means that, while spreads are low, we’re mindful that being negative too early can still be costly. It’s not as simple as it looks. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our experts discuss how high prices for auto insurance have been driving inflation, and the implications for consumers and the Fed now that price increases are due to slow.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Diego Anzoategui: I'm Diego Anzoategui from the US Economics team.Bob Huang: And I'm Bob Huang, the US Life and Property Casualty Insurance Analyst.Seth Carpenter: And on this episode, we're going to talk about a topic that -- I would have guessed -- historically we weren't going to think about too often in a macro setting; but over the past couple of years it's been a critical part of the whole story on inflation, and probably affects most of our listeners.It's auto insurance and why we think we're reaching a turning point.It's Thursday, July 18th at 10am in New York.All right, let's get started.If you drive a car in the United States, you almost surely have been hit by a big increase in your auto insurance prices. Over the past couple of years, everyone has been talking about inflation, how much consumer prices have been going up. But one of the components that lots of people see that's really gone up dramatically recently has been auto insurance.So that's why I wanted to come in and sit down with my colleagues, Diego and Bob, and talk through just what's going on here with auto insurance and how does it matter.Diego, I'm going to start with you.One thing that is remarkable is that the inflation that we're seeing now and that we've seen over the past several months is not related to the current state of the economy.But we know in markets that everyone's looking at the Fed, and the Fed is looking at the CPI data that's coming out. We just got the June CPI data for the US recently. How does this phenomenon of auto insurance fit into that reading on the data?Diego Anzoategui: Auto insurance is a relatively small component of CPI. It only represents just below 3 per cent of the CPI basket. But it has become a key driver because of the very high inflation rates has been showing. You know, the key aggregate the Fed watches carefully is core services ex-housing inflation. And the general perception is that inflation in these services is a lagged reflection of labor market tightness. But the main component driving this aggregate, at least in CPI, since 2022 has been auto insurance.So the main story behind core services ex-housing inflation in CPI is just the lagged effect of a cost shock to insurance companies.Seth Carpenter: Wait, let me stop you there. Did I understand you right? That if we're thinking about core services inflation, if you exclude housing; that is, I think, what a lot of people think is inflation that comes from a tight labor market, inflation that comes from an overheated economy. And you're saying that a lot of the movement in the past year or two is really coming from this auto insurance phenomenon.Diego Anzoategui: Yes, that's exactly true. It is the main component explaining core services ex-housing inflation.Seth: What's caused this big acceleration in auto insurance over the past few years? And just how big a deal is it for an economist like us?Diego Anzoategui: Yeah, so believe it or not, today's auto insurance inflation is related to COVID and the supply chain issues we faced in 2021 and 2022. Key cost components such as used cars, parts and equipment, and repair cost increased significantly, creating cost pressures to insurance companies. But the reaction in terms of pricing was sluggish. Some companies reacted slowly; but perhaps more importantly, regulators in key states didn't approve price increases quickly.Remember that this is a regulated industry, and insurance companies need approvals from regulators to update premiums. And, of course, losses increased as a result of this sluggish response in pricing, and several insurance started to scale back businesses, creating supply demand imbalances.And it is when these imbalances became evident that regulators started to approve large rate increases, boosting car insurance inflation rapidly from the second half of 2022 until today.Seth Carpenter: Okay, so if that's the case, what should we think about as key predictors, then, of auto insurance prices going forward? What should investors be aware of? What should consumers be aware of? Diego Anzoategui: So in terms of predictors, it is always a good idea to keep track of cost related variables. And these are leading indicators that we both Bob and I would follow closely.Used car prices, repair costs, which are also CPI components, are leading indicators of auto insurance inflation. And both of them are decelerating. Used car prices are actually falling. So there is deflation in that component. But I think rate filings are a key indicator to identify the turning point we are expecting this cycle.Seth Carpenter: Can you walk through what that means -- rate filings? Just for our listeners who might not be familiar?Diego Anzoategui: So, rate filings basically summarize how much insurers are asking to regulators to increase their premiums. And we actually have access to this data at a monthly frequency. Filings from January to May this year -- they are broadly running in line with what happened in 2023. But we are expecting deceleration in the coming months.If filings start to come down, that will be a confirmation of our view of a turning point coming and a strong sign of future deceleration in car insurance inflation.Seth Carpenter: So Bob, let me turn to you. Diego outlines with the macro considerations here. You're an analyst, you cover insurers, you cover the equity prices for those insurance, you're very much in the weeds. Are we reaching a turning point? Walk us through what actually has happened.Bob Huang: Yeah, so we certainly are reaching a turning point. And then, similar to what Diego said before, right, losses have been very high; and then that consequently resulted in ultimately regulators allowing insurance companies to increase price, and then that price increase really is what's impacting this.Now, going forward, as insurers are slowly achieving profitability in the personal auto space, personal auto insurers are aiming to grow their business. And then, if we believe that the personal auto insurance is more or less a somewhat commoditized product, and then the biggest lever that the insurance companies have really is on the pricing side. And as insurers achieve profitability, aim for growth, and that will consequently cost some more increased pricing competition.So, yes, we'll see pricing deceleration, and that's what I'm expecting for the second half of the year. And then perhaps even further out, and that could even intensify further. But we'll have to see down the road.Seth Carpenter: Is there any chance that we actually see decreases in those premiums? Or is the best we can hope for is that they just stopped rising as rapidly as they have been?Bob Huang: I think the most likely scenario is that the pricing will stabilize. For price to decrease to before COVID level, that losses have to really come down and stabilize as well. There are only a handful of insurers right now that are making what we call an underwriting profit. Some other folks are still trying to make up for the losses from before.So, from that perspective, I think, when we think about competition, when we think about pricing, stabilization of pricing will be the first point. Can price slightly decrease from here? It's possible depending on how intensive the competition is. But is it going to go back to pre-COVID level? I think that's a hard ask for the entire industry.Seth Carpenter: You were talking a lot about competition and how competition might drive pricing, but Diego reminded all of us at the beginning that this industry is a regulated industry. So can you walk us through a little bit about how we should think about this going forward?What's the interaction between competition on the one hand and regulation on the other? How big a deal is regulation? And, is any of that up for grabs given that we've got an election in November?Bob Huang: Usually what an insurer will have to do in general is that for some states -- well actually, in most cases they would have to ask for rate filings, depending on how severe those rate filings are. Regulators may have to step in and approve those rate filings.Now, as we believe that competition will gradually intensify, especially with some of the more successful carriers, what they can do is simply just not ask for price increase. And in that case, regulators don't really need to be involved. And then also implies that if you're not asking for a rate increase, then that also means that you're not really getting that pricing -- like upward pricing pressure on the variety of components that we're looking at.Seth Carpenter: To summarize, what I'm hearing from Bob at the micro level is those rate increases are probably slowing down and probably come to a halt and we'll have a stabilization. But don't get too excited, consumers. It's not clear that car insurance premiums are actually going to fall, at least not by a sizable margin.And Diego, from you, what I'm hearing is this component of inflation has really mattered when it comes to the aggregate measure of inflation, especially for services. It's been coming down. We expect it to come down further. And so, your team's forecast, the US economics team forecast, for the Fed to cut three times this year on the back of continued falls of inflation -- this is just another reason to be in that situation.So, thanks to both of you being on this. It was great for me to be able to talk to you, and hopefully our listeners enjoyed it too.Bob Huang: Thank you for having me here.Diego Anzoategui: Always a pleasure.Seth Carpenter: To the listeners, thank you for listening. If you enjoy Thoughts on the Market, please leave us a review where

Financial markets can be sensitive to news cycles, but our Global Head of Fixed Income and Thematic Research offers a word of caution about reacting to recent headlines about the US presidential election.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about development in the upcoming US elections.It's Wednesday, July 17th at 10:30am in New York. Financial markets are starting to reflect the possibility of a Trump presidency. Investors may be taking cues from a few current developments. There’s the recent weakening of President Biden’s polling numbers in key swing states such as Pennsylvania, Michigan and Wisconsin. There’s also the ongoing discussion about whether he will remain the Democratic nominee. And there's also former President Trump’s increased win probabilities in prediction markets, as well as the perception that Democrats will have more trouble pursuing their agenda in the wake of the assassination attempt against him. To that end we’ve seen moves in key areas of markets sensitive to what we have argued will be the policy impacts of a Trump presidency, including a steepening of the US Treasury yield curve. But – a word of caution. These market reactions to recent political events may be rational, but it's not clear they’re sustainable.  First, there are plausible ways investors’ perceptions of the likely outcomes of this election could shift. Voters can have very short memories, resulting in polls shifting to partisan priors. This happened with popular opinion on elected officials following notable incidents in recent years – such as the events of January 6th, 2021, the US withdrawal from Afghanistan, and more. Also, if President Biden were to withdraw as a candidate, it’s possible investors could perceive that a different candidate could tighten the race. For example, there have been recent surveys showing alternate Democratic candidates polling better than President Biden. Second, there’s also room for investors to misunderstand the policy path that could follow an election outcome as well as the impact of that path. For example, we’ve seen some recent press articles linking the broadening out of positive performance in the equity market to the likelihood of a Trump win on perceived benefits of friendlier tax policies that might result from this outcome. But if investors only focus on that policy, they’re not incorporating the potential offsetting effects that could come from policies that could challenge the economic growth outlook, such as higher tariffs – something former President Trump has advocated for. So bottom line, it makes sense to interrogate what seems like clear links between the upcoming election and markets.Some linkages are strong, and it’s possible that will make for a good investment strategy; others are weak and may break under scrutiny. We’ll help you sort it out here. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Global Cross-Asset Strategist explains why she sees a future for the 60/40 portfolio strategy, which worked well for over half a century and may continue to perform well – with some modifications.----- Transcript -----Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss the future of the 60/40 equity/bond portfolio. It’s Tuesday, July 16th, at 10am in New York.Now investors have been asking: Is the 60/40 portfolio -- which allocates 60 percent to stocks and 40 percent to bonds -- dead? After all, the last two years saw some of the worst returns of this strategy in decades. Now, we think the concerns about this widely used strategy are not unfounded, but definitely a bit exaggerated. Exactly how one thinks about the right mix of equities and bonds within this type of portfolio though will need to change.The strategy of investing 60 percent of a portfolio in equities and 40 percent in bonds to lower portfolio risk evolved from modern portfolio theory in the 1950s. To succeed, bonds must be less volatile than stocks and the correlation between stock and bond returns can't be 1 -- because that would mean a perfect positive correlation between stocks and bonds. And this correlation has been below 1 and low for a long time because growth and inflation have moved up and down in tandem for a long time. Now what does this have to do with anything, you may ask. Well, typically in an environment where equities are rallying on the back of strong growth, inflation is also increasing – which in turn means that nominal yields stay high, dampening bond returns; and vice-versa in a recessionary scenario. Now, in both of those cases, the negative stock-bond return correlations is related to the positive growth inflation correlation. Which explains why the strategy of the 60/40 equity/bond portfolio worked so well for decades, particularly in the low-vol, high-growth inflation correlation, low stock-bond returns correlation environment of the late aughts to 2010s. Unfortunately for investors though, this has not been the backdrop for the last few years. The highly unusual macro environment coming out of pandemic broke that relationship between growth and inflation, which in turn broke the relationship between stocks and bonds, led to a spike in fixed income volatility, and dragged bond returns to lowest levels in decades over the last couple of years. But we believe these factors will slowly normalize, which means 60/40-like strategies should work again. While the levels of correlation and bond volatility going forward may look different from history, and definitely different from the QE period, as long as bonds have lower risks than stocks – and there’s little to suggest they won’t – bonds will continue to be good diversifiers. But it’s important for investors to ask themselves: what could drive correlation between stocks and bonds going forward? Well, longer term, the path of correlation between the two assets depends in part on the relationship between economic growth and inflation, as I touched on earlier. And this is where AI can come in. Positive productivity shocks from GenAI tech diffusion and the energy transition may change that dynamic between growth and inflation. And at the same time, decoupling in the world’s key economic regions as a result of the transition to a multipolar world can alter the correlation between regional equities and rates. So, will the 60/40 portfolio be the strategy of the future? Or is it going to be more like 70/30 or even 50/50? Slower normalization of volatility and correlation means that a portfolio with more equity could yield better risk/reward than a 60/40 mix. On the other hand, as the world’s 65+ year-old population continues to grow over the next decades, this aging demographic may demand higher allocations to less volatile assets, even at the expense of lower returns. Or maybe, just maybe, there is another solution. Instead of a simple 60/40 like strategy, investors can look beyond government bonds to other diversifiers, and building a multi-asset portfolio with more flexibility. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Retail analyst and U.S. Internet analyst connect the dots on how technology is helping the retail industry to cash in on the future.----- Transcript -----Simeon Gutman: Welcome to Thoughts on the Market. I'm Simeon Gutman, Morgan Stanley's Hardlines, Broadlines, and Food Retail Analyst.Brian Nowak: And I'm Brian Nowak, Morgan Stanley's US Internet Analyst.Simeon Gutman: And on this episode of the podcast, we'll hear how retailers are using technology to make a comeback and set themselves up for the future.It's Monday, July 15th at 6pm in London.Brian Nowak: And it's 1pm in New York.Simeon Gutman: Retail has taken a big hit over the last few years. The long tail of the pandemic, outbreaks of war and inflation have had a big impact on the landscape. However, our research suggests retail is finding its feet, and technology is playing a significant role.Automation, AI, and retail media are the game changers here. And we're seeing retailers of larger scale and larger size disproportionately invest in these technologies -- which means it will not benefit all retailers equally.My colleague Brian is here to help explain the technology and how these are manifesting themselves across the internet and technology landscapes. Brian, can you talk about how these things are materializing across your coverage universe?Brian Nowak: Thanks, Simeon. Across the US internet space, we're seeing early emerging use cases for Generative AI of many types. We are seeing improved targeting on the advertising side. We are seeing new diffusion and creative models being built where advertisers can create new types of advertising copy using large language models. We are seeing new forms of customer service using large language models and Generative AI. And in effect, we are seeing companies across the entire internet space better analyze their first party data to drive more new people and customers to their platforms -- to drive higher conversion and share of wallets from those customers. And ultimately more durable multiyear top-line growth, which in some cases is also leading to higher free cash flow growth over the long term as well. It's early, but it's very encouraging with what we're seeing for Generative AI and retail media across the space.Simeon Gutman: Can you talk about in more detail how retail media is influencing the success and the prospects for some of your companies?Brian Nowak: Retail media is a emerging, rapidly growing, new high margin revenue stream that is moving across the internet space. Large companies are analyzing more of their data and essentially creating new advertising units that users and consumers can click on to drive transactions. And they're finding ways to better link these advertising dollars to transactions and ultimately creating a new revenue stream that we think is going to drive more durable top-line growth -- and because of its high margin nature, also more durable, multiyear free cash flow growth. It is benefiting the commerce players. It is benefiting the online advertising players. And it's also benefiting the advertising technology players.So with that as a backdrop, Simeon, where are you seeing Generative AI, retail media, and maybe even automation, start to manifest itself throughout the retail landscape?Simeon Gutman: Those are the three pillars of technology that are influencing retailers. Taking a quick step back, what's changing is that market share in retail is concentrating and consolidating among the largest players. And if you think about the investments required for some of these new capabilities, the companies that have the greatest ability to invest should see the greatest benefits. That means that the big could get bigger at an even faster rate. And this is why the stakes in retail are growing even faster.Now with, respect to these technologies. Let's start with AI. AI is helping retailers analyze big pieces of data that they never had an ability to do in such a quick way. That could help them refine their search criteria to consumers scanning a website. That could help them improve the algorithms in a distribution center with robots creating orders.Second, speaking of robots, bringing automation to distribution centers, supply chains for retailers can cost anywhere between 2 to 6 per cent of sales. There's a significant opportunity to reduce the amount of labor -- human labor -- in these distribution centers by automating them; whether it's dry goods, whether it's grocery items, as tricky as frozen and perishable items.And then lastly, retail media, the way that you mentioned, Brian, the benefit to your companies is very similar to retailers. There are now advertising dollars that are moving into new channels, whether it's closed loop advertising in store or retail media that's appearing on websites -- where some of the larger and more successful companies have a lot of traffic and advertisers are intrigued to show them offers and deals to try to change their perception or behaviors.So those three pieces of technology are slowly transforming the retailer. So next time you step into a retail store, there may be more technology that meets the eyes.Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Head of Corporate Credit Research explains why he expects the US Federal Reserve to make three rate cuts before the end of the year, starting in September.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why it's looking more likely that the Fed should, and will, cut interests rates several times this year.It's Friday, July 12th at 2pm in London.Last week, we discussed why the case for Fed rate cuts this year was strengthening. Credit markets generally don’t care too much about the exact timing or pace of policy rates, but they do care if a central bank is behind the curve. That’s because over the last 40 years, the worst returns for credit have repeatedly overlapped with periods where the Fed was too late in reversing tight monetary policy. After all, interest rates impact the economy with a pretty long and variable lag; and a interest rate cut today may not be fully felt in the economy for 12 months – or even longer. It’s therefore important for a central bank to be proactive. And so, with the recent US economic data softer, and the Fed appearing in little rush to act, the concern was straightforward: if the Fed is waiting for signs of economic weakness to be obvious, it will take too long to lower interest rates to blunt this. The Fed will be behind the curve. This risk of acting too late hasn’t gone away, and it’s a key reason why we think credit investors should be rooting for economic data in the second half of this year to remain solid, in line with Morgan Stanley’s base case. But this week did bring some events that suggest the Fed may start to adjust rates soon. First, in testimony before the US Congress, Chair Powell repeatedly emphasized that the risks for the US economy are becoming more balanced. Previously, the Fed had appeared to be much more focused on an upside scenario where conditions are hotter rather than a scenario where growth slowed unexpectedly. Second, in data released yesterday, US Consumer Price Inflation – or CPI – came in lower than expected. Overall, prices actually fell month-over-month, something that hasn’t happened since May of 2020, a time when the pandemic was raging, and Fed rates were near zero percent. Morgan Stanley’s base case is that moderating inflation will lead the Fed to cut interest rates by 25 basis points in September, November and December of this year. For credit, the question of “what do these rate cuts” mean is an ‘and’ statement. If the Fed is lowering rates and growth is holding up, you are potentially looking at a mid-1990s scenario, the best period for credit in the modern era. But if the Fed is cutting and growth is weak … well, over and over again, that has not been good. We remain constructive on credit, expecting three Fed rate cuts this year to coexist with moderate growth. But weaker data remains the risk. For credit, good data is good. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Freight Transportation & Airlines Analyst discusses the key takeaways from his mid-year corporate travel survey, which includes a number of positive trends for the second half of 2024.----- Transcript -----Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan Stanley’s Freight Transportation and Airlines analyst. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss my expectations for corporate travel in the second half of this year. It’s Thursday, July 11th, at 10am in New York. More and more business travelers are packing their bags and taking a flight for business meetings. In fact, our corporate travel survey suggests that a record 50 percent of respondents marked their travel itineraries as returning to pre-COVID levels. As well, corporate travel budgets are expected to be up five to seven percent year-over-year in 2024, and about six percent in 2025. This means significantly more flights, hotels and car bookings for corporate travel.Interestingly, this is the first survey since 2021 that larger enterprises were more optimistic on corporate travel demand compared to smaller enterprises.The shift to virtual meetings over the next two years will likely be stable. Companies continue to predict that 12-13 percent of travel volume will be replaced by virtual meetings in 2024 and 2025. Looking ahead, respondents expect this level to hold through 2025, supporting some level of permanent shift we think.For US airlines specifically, we have started to see more signs of life within the corporate space. Several US airlines are pointing to noticeable improvement in the first quarter after fairly stagnant volumes at the end of 2023. We also saw a reversal from prior surveys with larger corporations recovering faster than smaller enterprises, which had initially led the post-COVID recovery.This positive trend in airline demand is supportive of our attractive view on US aerospace, as well. Even though global air traffic has already reached pre-COVID-19 levels, it is still about 32 percent below where the trendline would have been if COVID-19 had not happened, which leaves more room for growth.For business aviation, private jet use should remain strong and stable as a large majority of survey participants are not planning to change their business jet travel. Higher interest rates and a potentially slowing economy could lead to a potential slowdown in business jet demand, but this hasn’t happened so far as there continues to be limited excess capacity in the industry as well as continued strong demand for aircraft.Our colleagues in Europe note that although near-term indicators are positive, 40 percent of European respondents now do not expect corporate travel volumes to return to 2019 levels. This is concerning for the longer-term prospects of European corporate demand growth, which appears to be weaker than US growth.Whether you're flying private jets or commercial, or choosing to keep your team meetings virtual, we'll continue to monitor corporate travel trends, and let you know of any updates to those flight manifests. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

U.S., French and Indian elections may have a minimal effect on equity markets, particularly in the short term, according to our Global Head of Fixed Income and our Chief Global Cross Asset Strategist.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research.Serena Tang: And I'm Serena Tang, chief Global Cross Asset Strategist,Michael Zezas: And on this episode of the podcast, we'll discuss what the elections in the US and Europe mean for global markets.It's Wednesday, July 9th at 10am in New York.As investors digest the results of the French election and anticipate the upcoming US presidential election, there's some key debates that are surfacing. And so I wanted to sit down with Serena to dig into these issues that are top of mind for investors.Serena, do you expect the upcoming US elections will impact markets in the run up to November?Serena Tang: Significantly, not likely -- because if we look at history, for stocks for example, in any election year, returns don't look significantly different from any other year.Serena Tang: My team ran some cross asset analysis on market behavior in and out of prior US elections using as much data as we have. And what has been very interesting is that whether a Democrat or Republican candidate eventually takes the White House, that doesn't change the trend of returns into an election.The form of the future elected government, whether it is divided or unified, that has also never really bothered stock markets before the vote. And you can see very, very similar patterns in bond yields, the dollar and gold. Now, what this means is that even if an investor has perfect foresight and know the results of the elections now, it won't necessarily give them an edge over the next few months.Serena Tang: Now, beyond the election is really when you see performance in various election outcome scenarios really diverge. So, whether the election was tight or not seemed to have led US rates to see very different levels of returns 12 months out from an election. Whether the outcome means a unified or divided government saw very large swings in gold prices.Now there are a lot of caveats. Every election is different. The economic conditions in every election is different. And as much as we talk about other historical periods, the truth is there aren't a lot of data points to work with. Data for S&P 500 going back to 1927 reaches the most far back among the major markets, but even then it only covers 23 presidential elections.So what I'm trying to say is there have been a lot of presidents, but there aren't a lot of precedents, at least for markets.Michael Zezas: The US election isn't the only election making headlines this year. For example, we just had an election in France that had a surprising result. How does the outcome there affect your outlook on the market?Serena Tang: It doesn't, in short. It doesn't change our bullish view on European equities at all. As you know, we have been constructive on that market since January and added significant exposure in our asset allocation then -- very much on the back of our European equity strategist Marina Zavolok coming out with an out of consensus bullish call for European stocks.Serena Tang: We like the market because of its cheap optionality and convexity. It has about 20 per cent revenue exposure to US but at much cheaper valuation. And it has about 20 per cent revenue exposure to EM, meaning should we get a growth surprise to the upside; you're geared to that but at much lower volatility than owning EM equities outright.Now, none of this has changed post French elections, and we also don't see significant increase in bearish tail risks. If you look at other markets like Euro IG corporate credit or the euro, those markets are suggesting risks in France are idiosyncratic, not systemic. So we maintain our overweight in European stocks.Serena Tang: Everything that I just said is also true for our bullish view on Indian equities, even after elections a month ago. Ridham Desai, head of India research, argued the election outcome there is likely to usher in more structural reforms and really reinforces our forecast of 20 per cent annual earnings growth over next five years, sustaining India's longest and strongest bull market ever. Bullish secular factors for Indian equities have not changed and therefore our bullish view on Indian equities have not changed.Michael Zezas: And elections have consequences for how countries interact with one another. And how their policies differ from one another. And one area of the markets that tend to be sensitive to this is the foreign exchange markets. So are there any impacts you're looking for around foreign currencies?Serena Tang: Yes, in particular, the dollar. But let me start with the euro first. Because I talked earlier about our bullish view on European equities; and in fact, in our asset allocation, we actually have a higher allocation to Europe versus US for stocks, bonds, and corporate credit bonds. The one European market we're more cautious on is the euro. And this actually has nothing to do with the French election results, per se -- because what matters now really is dollar strength. Now, part of this is a rates differential issue. Our US economics team are expecting the Fed to start cutting in September, while the ECB, of course, has already started easing policy. So yield differentials really favor the dollar here.But we also need to factor in the election, which seems to be the theme for today. Our FX [foreign exchange] strategy team thinks markets really need to start pricing in material likelihoods of dollar positive changes in US fiscal, foreign and trade policy as the election approaches. Meaning the dollar will continue its modest uptrend into the second half. And geopolitical uncertainty, of course, will also be dollar positive.Michael Zezas: So bottom line then. Elections clearly have consequences for markets but in the run-up to an election, there might not be a reliable pattern.Serena Tang: Exactly.Michael Zezas: Great. Well Serena, thanks for taking the time to talk.Serena Tang: Great speaking with you, Mike.Michael Zezas: And as a reminder, if you enjoy the podcast, please take a moment to rate and review us wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Record-high prices remain a key concern for buyers in the U.S. housing market. Our Co-Heads of Securitized Product Research dig into the data, explaining why they still believe a deceleration in home price growth will come.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. It's Tuesday, July 9th, at 1pm in New York. Jay Bacow: Jim, housing headlines just keep coming. Home prices are at record highs. What does that mean? How should we be thinking about that? James Egan: So, that has been a fun headline, and according to several measures of home prices, we are at record highs. But, let's put that into context. We've actually set a new record high for home prices every month for the past ten months. In fact, prior to a 12-month hiatus from July of ’22 to June of ’23, home prices had actually hit a new record high every month for 68 consecutive months. Jay Bacow: Alright, so if we're just talking about levels, it's important. But given that I'm a physicist by training, so are rates of change; and for that matter, changes to the rate of change, or acceleration, if you will. If there's something different about the current record of US home prices that is worth discussing, that would be interesting. James Egan: We think there is. Actually two months ago, home prices set a new record high. But it was also the first time in ten months that the pace of year-over-year home price appreciation did not accelerate. This month the pace of appreciation actually started to decelerate. As listeners of this podcast might remember, we've been calling for the pace of year-over-year home price appreciation to slow from above 6.5 per cent to just two percent by December. We are still above six percent today, but this could be the beginning of that deceleration. Jay Bacow: Right. And if there's going to be deceleration, Newton would say there needs to be some force that causes it. And my understanding is you thought that that force that causes it would be sale inventories increasing. Has that been the case? James Egan: Indeed, it has been actually. Total for sale inventory has increased for six consecutive months. And the pace of that growth is accelerating. Now, we do want to highlight that overall supply remains very tight. That part of the housing narrative hasn't changed. If we take a step back and look at the whole market, total months of supply are at just 4.5 per cent. Anything below six is really considered a seller's market there. On the other hand, this is the highest level that the market has experienced since the first half of 2020, which is another argument in our minds for the pace of home price appreciation to decelerate. But once we remove these pandemic era lows, four and a half months is close to the lowest level of the past 30 plus years. Jay Bacow: Alright, now sticking on the level context. Home prices weren't just the only thing that set a record level these days. Pending home sales just set a new record low in May. James Egan: Right, that's also the case. Now, we do want to put the record into context here. The pending home sales index that we're referring to only goes back to 2001. But over that 23 plus years, the May print was the lowest number that we've seen. Jay Bacow: Alright, so given all of that, how are you thinking about demand for housing amidst increasing supply? James Egan: Right. So this is a pretty important question. When it comes to demand at these levels, affordability remains very challenged. One of the primary questions for the US housing market moving forward is going to be the interplay between the absolute level of affordability and the direction and rate of change. Now, we are far from being able to declare a winner here. Sales volumes have increased off of 12 year lows from the fourth quarter of 2023; but at the same time, there are several demand indicators that are having trouble achieving liftoff, if you will. Pending home sales, for instance. They're not falling as fast as they have been, over the past two plus years; but they're also having a hard time achieving some sort of escape velocity as they continue to fall on a year-over year-basis. Mortgage applications for purchase -- another one of our leading indicators -- they're experiencing a similar dynamic. The first half of 2024 has been a noticeable second derivative improvement versus 2023, but that improvement has slowed and applications are still falling on a year-over-year basis. Now, part of this is going to be a function of mortgage rates going forward. Jay, what are we thinking there? Jay Bacow: Now, the biggest driver of mortgage rates is going to be the level of treasury rates. And our rate strategists are forecasting treasury rates to fall over the end of this year and into the middle of next year. If that happens, we would expect mortgage rates to get towards 6.25 to 6.5 per cent by next summer -- clearly materially lower than they are right now. But once again, the biggest driver of this is treasury rates. Not what's going on with the mortgage market. James Egan: And we continue to expect with that decrease affordability to improve, and that to drive year-over-year growth and sales in the second half of 2024 versus 2023. But it doesn't have to be a straight line to that outcome. And how are you thinking Jay, from a mortgage market perspective about sales volumes? Jay Bacow: So, the mortgage market is in a pretty interesting spot because there's almost two sides of it. There's the existing mortgage market, which is mostly made up of homeowners that have very low mortgage rates, and thus the coupon to the investor is relatively low; and they're trading at a discount. If turnover is low, then those bonds are outstanding for longer, which is bad for those investors. But, if that turnover is low, that means the supply to the market in the new higher coupon mortgages is relatively low, which is good for those investors in the new higher coupon mortgages. In effect, if turnover is lower, it's good for higher coupon mortgages, not so good for lower coupon mortgages. James Egan: And that's why all of this is so critical. If I were to, to summarize, we're paying attention to increasing inventory volumes in the housing market. We're paying attention to some of these demand statistics that are coming in a little softer than at least consensus estimates expected them to. We do think that home price growth is going to decelerate as a result. We also think it will remain positive. There continues to be very little overall supply in the US housing market. Jay, it was nice speaking with you. Jay Bacow: Jim, nice talking physics in the housing market with you. James Egan: Thanks for listening. And if you enjoyed this podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Inflation continues to be a key issue for voters in elections around the world. Our CIO and Chief US Equity strategist explains its potential influence on the upcoming US presidential election, and how investors may react to potential outcomes of this race.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the consequences of elections on policy and markets. It's Monday, July 8th at 2:30pm in New York.  So let’s get after it.  Several important elections around the world have taken place with important implications for policy and markets. Most notably, elections in India, Mexico, the UK and France have all garnered the attention of investors.While these elections are unique to each country, there does appear to be a growing focus on the issue of economic inequalities and immigration. While these inequalities have been building for decades, the COVID pandemic and policies implemented to deal with it have ushered in a higher focus on these disparities and a general level of uncertainty about the future on the part of many citizens.Of all the changes affecting the average person most adversely, inflation stands out as the most challenging. While the rate of change on inflation has been steadily falling since 2022, the price level of a number of goods and services remains challenging for many. Prices for basic items like food, shelter, healthcare, insurance and utilities are 30 to 50 per cent higher than they were pre-pandemic. Offsetting some of this increase has been the rise in home equity and financial asset prices, but this only helps those who are asset owners. Fixed rate mortgages have also been a notable positive offset to rising prices and interest rates. For many, there is a natural arbitrage between these pre-existing, historically low mortgage rates and money market rates. Once again, such an arbitrage is only available to those who have large piles of cash.In our view, these dynamics further the case that inflation is going to play a major role in this year's upcoming U.S. election much like it is having an impact globally.  The recent US Presidential debate prompted inquiries from investors on what a potential Trump win or a potential Republican sweep could mean for markets. Based on initial market reactions and our conversations with clients, there is a consistent view that both growth and longer-term interest rates could move higher under this outcome. This has led to a greater appetite to rotate one’s equity portfolio toward value and cyclical stocks, which also worked leading into the 2016 election. Market expectations for fiscal expansion, reflation and less regulation under a Trump Presidency support such moves.   However, we think there’s also a couple of important dynamics to consider. First, we would argue that the cycle is more mature today than it was in 2016 as evidenced by the two-and-a-half-year decline in the Conference Board Leading Economic Indicator and the nearly 2-year inversion of the yield curve. Given a later cycle environment is historically a backdrop where the market pays up for quality and liquidity, we advise staying up the quality curve and away from small cap cyclicals, which worked in 2016. In short, the state of the business cycle right now is more important than the election outcome. As such, we think investors should stay selective within cyclicals.   Second, the market welcomed a reflationary playbook in 2016. Inflation was not a headwind to consumers in the way it is now, and the US economy was recovering from a global manufacturing recession, the recovery of which was aided by the prospects of a pro-fiscal/reflationary policy regime. Today, inflation is a notable headwind to consumers as discussed previously and fiscal sustainability dynamics remain top of mind for the bond market. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

Markets are suggesting that spirits consumption will return to historical growth levels post-pandemic, but our Head of European Consumer Staples Research disagrees.----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Along with my colleagues bringing you a variety of perspectives, today I'll talk about a surprising trend in the global spirits market.It's Monday, April 15, at 2pm in London. We all remember vividly the COVID-19 period when we spent much more on goods than services, particularly on goods that could be delivered to our homes. Not surprisingly, spirits consumption experienced a super-cycle during the pandemic. But as the world returned to normal, the demand for spirits has dropped off. The market believes that after a period of normalization, the US spirits market will return to mid-single-digit growth in line with history; but we think that’s too optimistic.Changes in demographics and consumer behavior make it much more likely that the US market will grow only modestly from here. There are several key challenges to the volume of US alcohol consumption in the coming years. Sobriety and moderation of alcohol intake are two rising trends. In addition, there’s the increased use of GLP-1 anti-obesity drugs, which appear to quell users' appetite for alcoholic beverages. And finally, there’s stiffer regulation, including the lowering of alcohol limits for driving.A slew of recent survey data points to consumer intention to reduce alcohol intake. A February 2023 IWSR survey reported that 50 per cent of US drinkers are moderating their consumption. Meanwhile, a January 2024 NCSolutions survey reported that 41 per cent of respondents are trying to drink less, an increase of 7 percentage points from the prior year. And importantly, this intention was most concentrated among younger drinkers, with 61 per cent of Gen Z planning to drink less in 2024, up from 40 per cent in the prior year's survey. Meanwhile, 49 per cent of Millennials had a similar intention, up 26 per cent year on year.Why is all this happening? And why now? Perhaps the increasingly vocal commentary by public bodies linking alcohol to cancer is really hitting home. Last November, the World Health Organization stated that "the higher the amount of alcohol consumed, the higher the risk of developing cancer" but also that "half of all alcohol-attributable cancers in the WHO European Region are caused by ‘light’ and ‘moderate’ alcohol consumption. A recent Gallup survey of Americans indicated that young adults are particularly concerned that moderate drinking is unhealthy, with 52 per cent holding this view, up from 34 per cent five years ago. Another explanation for the increased prevalence of non-drinking among the youngest group of drinkers may be demographic makeup: the proportion of non-White 18- to 34-year-olds has nearly doubled over the past two decades.And equally, the cost of alcohol, which saw steep price increases in the last couple of years, seems to be a reason for increased moderation. Spending on alcohol stepped up materially over the COVID-19 period when there were more limited opportunities for spending. With life returning to normal post pandemic, consumers have other – more attractive or more pressing – opportunities for expenditure.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. It helps more people to find the show.

Central banks play a crucial role in monetary policy and moderating the business cycle. Our Head of Corporate Credit Research explains why, despite their power, these financial institutions can’t quickly steer through choppy economic waters.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why credit may start to get more concerned that the Fed will make the same mistake it often does.It's Wednesday, July 3rd at 2pm in London.Central banks are among the most powerful actors in financial markets, and investors everywhere hang on their every word, and potential next move. If possible, that seemed even more true recently, as central banks first intervened aggressively in bond markets during the height of COVID, and then raised interest rates at the fastest pace in over 40 years. Indeed, you could even take this a step further: many investors you speak to will argue central banks are the most important force in markets. All else comes second. But this view of Fed supremacy over the market and economy has an important caveat. For all of their power, the Federal Reserve did not prevent the recession of 1990. It did not prevent the dotcom bust or recession of 2001. It did not prevent the Great Financial Crisis or Great Recession of 2007-2009. These periods have represented the vast majority of credit losses over the last 35 years. And so, for all of the power of central banks, these recessions, and their associated default cycles in credit, have kept happening. The reasons for this are varied and debatable. But the central issue is that the economy is a bit like a supertanker; it’s hard to turn quickly. You need to make adjustments well in advance, and often well before the signs of danger are clear. Currently, the Fed is still pressing the economic brakes. Interest rates from the Federal Reserve are well above so-called neutral; that is, where the Fed thinks interest rates neither boost, nor hold back, the economy. The justification for riding the break, so to speak, is that inflation earlier this year has still been higher than expected. But in the last two months, this inflation has rapidly cooled. Our economists think this trend will accelerate in the second half of the year, and ultimately allow the Fed to cut interest rates in September, November, and December. Still-high rates and cooling inflation isn’t a problem when the economic data is strong. But more recently, this data has cooled. If that weaker data continues, credit investors may worry that central banks are too focused on the high inflation that’s now behind us, and not focused enough on the potential slowing ahead. They’ll worry that once again, it may be too late to turn the proverbial economic ship. We’d stress that the risks of this scenario are still low; but late-reacting central banks have – historically, repeatedly – been credit’s biggest vulnerability. It makes it all the more important, that as we head into summer, that the data holds up. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. And for those in the US, a very happy Fourth of July.

Our Global Head of Fixed Income recaps the aftermath of the first U.S. presidential debate, and how markets may react if forthcoming poll data shows a meaningful shift in the race.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the US elections and its impact on markets.It's Tuesday, July 2nd at 10:30am in New York. For months, investors have been asking us when markets will start paying attention to the US presidential election. Well, we think that time arrived with last week’s Presidential debate. The media coverage that followed revealed that many Democratic party officials became concerned about President Biden’s ability to win the November election. This understandably led many to ask if the race for the White House had meaningfully changed; If it was no longer a close one – and if so, what would that mean for markets that might have to start pricing in the impacts of a Trump Presidency. On the first question: While we think it's too early to conclude that the race is no longer a close one, we expect some data in the next week or two that could clarify this. The few polls that have been released following the debate show that voters are increasingly concerned about Biden’s ability to win; but they also show a level of support for Biden similar to what he enjoyed before the debates. What we haven’t seen yet is a set of high-quality polls gauging swing state voter preferences. And even modest deterioration in Biden’s support there could meaningfully boost Trump’s prospects. That’s because, going into the debate, polls showed former President Trump with a small but consistent lead in national and key swing state polls. Nothing outside the polling margin of error. But it still suggested that for President Biden to improve his odds of winning, he’d be served well by having a strong debate performance that moved the polls more in his favor.  It doesn’t appear that this has happened, and if polls show movement in the other direction for Biden, it would be fair to think of Trump as something of a favorite. But only for the time being. There’d still be time and catalysts for the race to change – including another scheduled debate in September. If we do end up with a race where Former President Trump is a more clear favorite, even if just for a short time, there could be reflections in the market. As we’ve previously discussed, a Trump win increases the chances of more of the expiring tax cuts being extended. The benefits of those cuts most clearly accrue to key sectors like energy and telecom, so there’s potential outperformance there.  In fixed-income – a steeper US Treasury yield curve is an outcome our macro strategy team is particularly attuned to. That’s because a Trump presidency brings greater uncertainty about future fiscal policy, which could be reflected in relatively higher yields for longer maturity bonds. But it also increases the chances of policy choices that create near term pressure on economic growth that could push shorter maturity yields lower. This includes higher tariffs and tighter immigration policies. So bottom line, the markets are paying attention. And the race is sure to have many more twists and turns. We’ll keep you updated on how we’re navigating it. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Rising rents and mortgage payments have been at the center of the inflation discussion. Our Global Chief Economist assesses whether monetary policy can effectively blunt those figures. ----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the housing market, inflation, growth and monetary policy. It's Monday, July 1st, at 11am in New York. Housing is at the center of many macro debates from growth to inflation. And when you put those two together – monetary policy. House prices have continued to rise despite high interest rates, which gives the impression to some of stalled deflation and forces consumers at times to make some really difficult choices. And in some economies, there's a seeming lack of responsiveness of housing to higher interest rates. All of which tends to prompt questions about the efficacy of monetary policy. So where are we? We think monetary policy is still working through housing as it usually does, but supply shortages, or in some places just idiosyncratic factors like buildable lands or permitting, that's supported home prices. And as has been the case across several sectors in this business cycle, there really are some factors about housing that's just different in this cycle than in previous ones. For the U.S., a key part of the housing story has been the mortgage lock in for homeowners. Our strategists have noted that the gap between the current new mortgage rate and the average effective mortgage rate is at historical highs. And the share of 30 year fixed rate mortgages is at its highest in a decade. Consequently, the inventory of existing houses has remained low because homeowners who have those really low mortgages are reluctant to move unless they have to. The market has become thinner with less available supply; and then if we think more broadly for the economy, there's a risk of labor market frictions if that mortgage lock in also reduces labor mobility. Now, there will be a decline in mortgage rates if we get the modest easing cycle from the Fed that we expect. But that decline will be similarly modest so that gap in rates will not be fully closed even if it narrows. And so there might be some uplift to supply of housing, but it might not be huge. That decline in mortgage rates can also supply demand, so then we have to think about the net of this shift in demand and the shift in supply. And ultimately what we think is going to happen is that there'll be a moderation in home price appreciation, but not an outright decline in home prices.First, the choice of housing for a lot of households is do you buy or do you rent? If you've got high home prices and high mortgages, buying is much less affordable and so it pushes people into renting, which could push up rents. That phenomenon is partly responsible for the surge in rents that we've seen over the past few years. In the longer run, there should be a sort of arbitrage condition between home prices and rents. And while rising home prices can impinge the spending power for first time homebuyers, rising house prices can actually boost sentiment and consumption for existing homeowners. And that mortgage lock in that I talked about before? Well, that can actually support aggregate consumption to some degree because now there's predictability of cash flows and the monthly payment is pretty low. So what do we do when we take all of this together? The housing market might be telling us that monetary policy is working a bit less effectively than historically, but not that monetary policy is not working. Home price appreciation is moderating. Housing starts have slowed, as usual, following those big rate increases. But that slowing? It's actually been a bit inconsistent because mortgage lock has meant that new supply is the only supply. Existing home sales, by contrast, are just plain weak. They're about as weak as they were around the financial crisis. We do not think the housing market overall is at risk of collapse, but monetary policy is restraining activity in a very familiar way. Thanks for listening, and if you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Head of Corporate Credit Research makes the case against the popular notion that solid economic data would be bad for markets, and instead offers a rationale for why now, more than ever, is the time for investors to root for positive economic developments.  ----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why good data … is good.It's Friday, June 28th at 2pm in London. One of the bigger investor debates of 2024 is whether stronger or weaker economic data is the preferred outcome for the market. This isn’t a trick question.  Post-COVID, a large spike of inflation led to the fastest pace of interest rate hikes by central banks in over forty years. And so there’s been an idea that weaker economic data, which would reduce that inflationary pressure and make central banks more likely to cut interest rates, is actually the better outcome for the market. Those lower interest rates after all might be helpful for moving the market higher or tighter. And stronger economic data, in contrast, could lead to more inflationary pressure, and even more rate increases. And so by this logic, bad data is good … and good data, well, would be bad. This “bad is good” mindset was prominent in the Autumn of 2022 and again in September of 2023, as markets weakened on stronger data and fears that it could drive further rate hikes. We saw the idea return this year, amidst higher-than-expected inflation readings in the first quarter. But we currently think this logic is misplaced. For markets, and certainly for credit, we think those who are constructive, like ourselves, are very much rooting for solid economic data. For now, good is good. Our first argument here is general. Over a long swath of available data, the worst returns for credit have consistently overlapped with the worst economic growth. Hoping for weaker data is, historically speaking, playing with fire, raising the odds that such weakness isn’t just a blip, and opens the door for much worse outcomes for both the economy and credit. But our second reason is more specific to right now. Central to this idea that bad data would be better for the market is the assumption that central banks would look at any poor data, change their tune and come to the market’s aid by lowering interest rates quickly. I think recent events really challenge that sort of thinking. While the European central bank did lower interest rates earlier this month, it struck a pretty cautious tone about any further easing. And the Federal Reserve actually raised its expected level of inflation and projected rate path on the same day that consumer price inflation in the US came in much lower than expected. Both increased the risk that these central banks are being more backward looking, and will be slow to react to weaker economic data if it materialises. And so, we think, credit investors should be hoping for good data, which would avoid a scenario where backward-looking central banks are too slow to change their tune. I’d note that this is what Morgan Stanley’s economists are forecasting, with expectations that growth is a little over 2 percent this year in the US and a little over 1 percent in the Euro Area for this year. We expect the economic data to hold up, and for that to be the better scenario for credit. If the data turns down, we may need to change our tune. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.