Morgan Stanley
  • Thoughts on the Market
  • Sep 11, 2020

Markets Ponder a Trillion-Dollar Question

With Andrew Sheets

A downward adjustment in some high-flying U.S. tech stocks has put investors on edge this month, but an impasse on fiscal stimulus negotiations may be the real issue to watch.

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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Current Episode Transcript

Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Assets Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, September 11th, at 2:00 p.m. in London.

September has seen markets get off to a volatile start. Two issues are at play, both of which are concerning the market and are easy to muddle together. But we think these two things have very different levels of severity and long run implications for investors, at least in my view.

The first issue is the adjustment in U.S. technology stocks, and the NASDAQ index. The NASDAQ rose sharply over the summer, and in August this rise started to show signs of excessive investor enthusiasm. Activity in call options, for example, rose to levels we'd never seen before, suggesting that despite the run-up we'd had, investors were becoming even more excited about even larger additional gains.

In September the NASDAQ has come back down to earth, so to speak, declining about 10% from its peak. This move has certainly been uncomfortable for investors and driven overall market volatility, given the size of that index.

But as far as problems go, it feels like a relatively minor one. Taking one of the most popular, most expensive segments of the market "off the boil", so to speak, might be a good thing from the perspective of long term sustainability of this rally. And the NASDAQ is still up about 20% for this year, suggesting that investors have some ability to withstand volatility at these levels.

So that brings us to the second issue, which has been circulating alongside the big swings in the tech sector. Since April, the U.S. economy has been supported by the largest domestic stimulus package in history, dubbed CARES. At the end of July, most of the provisions in this support package ran out.

Now, you might think that the expiration of a very important economic support package will be taken by the stock market as a bad thing. And indeed, this was my view, and one of the reasons why we reduced some of our exposure at the end of July. But ironically, the markets decided to view this situation as glass "half full": the market now assumes that further fiscal support will ultimately be approved, and in order for that to happen, what will get passed will end up being larger than it would have been otherwise.

It's hard to overstate just how much additional fiscal stimulus matters to our economic forecasts. We've been assuming that the U.S. Congress will eventually pass a further $1T stimulus package by the end of September. But passing a $2T deal would mean an extra $1T of stimulus relative to those expectations. On the other hand, the failure to pass any deal, would mean a $1T shortfall relative to those expectations. These are big numbers.

As the calendar has flipped to September, these negotiations are entering crunch time. The clock is ticking, and it appears that a deal is still elusive. While more of the market's attention has been on the NASDAQ, we think outcomes on fiscal policy could ultimately have a larger impact on our economic forecasts, and the longer run outlook for markets. Stay tuned.

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