Morgan Stanley
  • Thoughts on the Market Podcast
  • Apr 28, 2021

A Choppier, More Range-bound Summer?

With Andrew Sheets


Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues bringing a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Wednesday, April 28th, at 4:00 p.m. in London.

The weather in London has been unseasonably good, and combined with the easing of some local restrictions, has cracked the door to that most elusive of feelings: normality. Where all these people in my neighborhood were previously, I do not know, but they are out and they're spending money. Our economists forecast a strong rebound in UK GDP for the second quarter, and when struggling to find space on the pavement, that feels about right.

The catch, however, is that I think more normality also portends to a more difficult summer. Some of that is fundamental, some of that's psychological and some of that is a function of what is now in the price.

Fundamentally, the big focus will be on inflation. For the last 12 months, the question of whether it would materialize has been just that: speculation. But starting next month, we'll start to see it. Our economists forecast that U.S. Core PCE inflation, a key measure that the Fed focuses on, will hit about 2.5%. And then the month after that, it will hit 2.5% again. And then for the rest of the year, it should be 2% or higher.

Now, I don't think we're about to see runaway prices, but this will represent a significant shift relative to the last 12 months, as whether inflation returns and how fast that happens, are major questions driving how long the Federal Reserve can keep interest rates at very low levels.

Psychologically, May through September has historically seen lower, more volatile returns than the rest of the year. Many markets have seen pretty good gains year-to-date, and there could be a very human desire to take a little less exposure in the market, and maybe take advantage of this normality and enjoy a long deferred vacation.

The real crux of the issue, however, is what's now in the price. The year-to-date rally has increasingly eliminated the upside to our year-end targets here at Morgan Stanley. Across four major equity markets—the United States, Europe, Japan and Emerging Markets—only stocks in Japan are currently below our target for the end of this year. U.S. 10-yr Treasury yields and oil prices are also near our year-end expectations, and credit spreads are near a 50-year low. Now, we'll be sitting down soon for our semiannual outlook process, so it's possible that these longer-term forecasts change; but based on our current expectations, there just isn't much milk left in the proverbial carton.

Growth is still improving and liquidity is still abundant. The bull market is still intact, and I struggle to see the types of problems that defined the summer of 2010, 2011, 2012, and 2015. But given the factors I've discussed today, a harder, choppier, more range-bound summer does seem likely. We like increasing quality within equity portfolios, and reducing exposure to ‘cuspier’ parts of the credit markets, specifically CCC-rated bonds and longer dated corporate debt.

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen, and leave us a review. We'd love to hear from you. 

Summer months have historically seen lower, more volatile returns, but strong year-to-date gains and potentially higher inflation could intensify that trend.

Each week, Chief Cross-Asset Strategist Andrew Sheets, or a member of his team, offers perspective on the forces shaping the markets as well as insights on investment opportunities and risk across global asset classes.

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