According to Morgan Stanley, maintaining the global economy in balance with sustainable growth and low inflation is like finding a unicorn in the woods. Yes, in theory, it is possible to some extent, but in reality, investors may never see perfect market conditions.
In their latest report, experts note that financial markets seesaw in anticipation of the Federal Reserve's rate cut in September, especially after inflation slightly eased in June. Rising bets on the Fed’s monetary easing pushed the US Treasury yield steeply down and made stock investors revise their forecasts.
Having conquered a peak of 5,667 points, the S&P 500 index sank by 3%, while the Nasdaq Composite (which includes all high-tech heavyweights) showed a two-digit drop.
On the contrary, the Russell 2000 index, representing small businesses, jumped by more than 10%. As a result, steady investments unexpectedly outpaced more dynamic ones, cyclical sectors rose from the ashes, and "lower quality" stocks surprised by leaving established market leaders behind.
Curiously, over 80% of stocks traded above their 200-day average, showing that faith in a soft economic slowdown remains rock-solid.
However, Morgan Stanley reminds us that recent economic data has been patchy. Moreover, investors are in dismay due to poor corporate earnings reports for Q2 2024. Therefore, they have to downgrade their forecasts because investments in artificial intelligence-related stocks have proven dubious. The stock market is highly sensitive to changes in company valuations and interest rate expectations.
Morgan Stanley's Global Investment Committee (GIC) advises caution, as the path to a soft landing in the US is full of bottlenecks and pitfalls.
Meanwhile, global economic growth is slowing down. So, market participants are bewildered by the US central bank’s uncertain agenda for monetary policy. All of this hints that the Federal Reserve could make a mistake.
Morgan Stanley suggests diversification of portfolios is a must-do for investors. It would be wise to invest in diverse assets, focus on fair valuations, and pick shares with moderate growth.
Analysts recommend paying close attention to the equally weighted S&P 500 index or selecting stocks in stable or cyclically sensitive sectors. Experts urge investors to avoid entering the market during a rapid rally of unfamiliar small companies and sharp swings in the stocks of the seven high-tech giants.
