Morgan Stanley
  • Wealth Management
  • Dec 10, 2019

A Cautious Take on the Bull Market

Before adding broad exposure to the S&P 500, consider these risks to what may be an excessively optimistic outlook for U.S. equities.

The official Morgan Stanley forecast for the S&P 500 in 2020 is 3,000, a nice round number with one somewhat glaring problem: the S&P 500 has already surpassed 3,000 and we’re still in 2019. This suggests that U.S. stocks may be getting ahead of themselves.

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As I’ve written recently, I worry that investors are wearing rose-colored glasses and believe many of the current points of uncertainty will resolve with positive outcomes. Below are three key areas where investors seem to be expecting positive catalysts, but recent data convinces me to remain skeptical:

  • U.S. economic growth may not rebound as expected. While global growth is improving, we’ve seen continued and unanticipated weakness in U.S. data, particularly in manufacturing. For example, the new orders index within the Manufacturing Institute for Supply Management Report on Business fell to 47.2, the lowest level since June 2012. Services data was also weak. Construction spending fell in October when a 0.4% gain was expected.
  • Labor market data is showing cracks. Non-farm payrolls have remained strong, but softer, survey-based data, which tends to be more forward looking, has started to roll over. The “jobs plentiful” measure within the Consumer Confidence series is past peak, as is the Job Openings and Labor Turnover Survey (JOLTS) data. Most tellingly, the smallest businesses (those with fewer than 20 employees), are now shedding jobs. That suggests weakness in the “gig” economy that isn’t yet visible in the unemployment claims data.
  • Improvement in trade policies may not lead to more corporate spending. Many investors expect a potential trade truce to lead to upside in capital spending. That may not be a good call either. Morgan Stanley’s indicator of capital spending intentions has remained stuck, despite some signs that trade tensions are improving. The Atlanta and Philadelphia regional Federal Reserve Bank surveys show spending stuck at levels last seen in 2011 and 2015. Most troubling: research and development budgets aren’t growing. That’s a bad sign for tech spending, especially for the maturing cloud-related “software and services” sector, which represents more than a third of all private non-residential spending.

Overall, I can’t see any catalysts that could propel the market higher from here. I expect the S&P 500 to trade in a narrow range in 2020 and think investors will likely be better rewarded by active management, rather than passive index investing.

For stock selection, I suggest seeking out high quality, reasonably priced equities. Aim to balance defensive positions in sectors like consumer staples, utilities and health care against cyclical names in financials, industrials and energy. I also recommend scaling back on expensive technology and consumer discretionary names. Meantime, watch incoming economic data for confirmation that investors’ rosy expectations are actually being met.