Morgan Stanley
  • Thoughts on the Market
  • Aug 7, 2020

The Case for Optimism in the Near Term

With Andrew Sheets

Chief Cross-Asset Strategist Andrew Sheets says although their base case for continued market strength is measured, there is an argument to be made for a bull case forecast.

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-Asset 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, August 7th, at 2pm in London.

The other week, I talked about why we see a more challenging market environment over August and September. And based on Thursday's closing level, the S&P 500 is now at my colleague Michael Wilson's target for the middle of next year. But in the interest of balance, I wanted to discuss the case to be more optimistic in the near term, and why we think this remains a bull case outcome rather than our base case expectation. I'll try to break this story down along three main themes: economic fundamentals, market valuations, and supply versus demand.

On economic fundamentals, the near-term bull case is that global economic data will continue to recover and really shrug off any new Autumn resurgence of the Coronavirus. Recent U.S. data, for example, has continued to hold up reasonably well, even as new COVID-19 cases have risen, suggesting there might be a weaker linkage between the two than before. But we think the economic recovery has also been greatly aided by government stimulus; stimulus that in the US may soon start to run out. As of this recording, there was still no sign that more federal spending would be on the way.

Next, there are valuations. U.S. and global equity markets are now trading near their recent valuation highs in price-to-earnings and other metrics. And this is probably the most worrying element of today's market. But current valuations are also very bifurcated, with stocks in high growth segments like technology, very expensive, and other parts of the market, far more average versus history. The bull case is that the expensive parts of the market can manage to hang on to the valuations they have, and the rest of the market can see its valuations go higher.

But the strongest argument for continued market strength is likely the idea that there remains a lot of "cash on the sidelines," so to speak. Central banks are continuing to buy assets in large numbers. Investors raised a lot of cash during February and March, as the virus hit, that they haven't fully put back into the market. The optimistic case is that this money finally relents and buys into the market in the face of heavy central bank intervention.

This idea that there is cash on the sidelines is one of the factors that, previously, had been a key part of our optimism. In the near term, however, we simply think that people could hold onto their cash a little while longer. Whether it's the uncertainty over further government stimulus, or the coming U.S. elections, or U.S. China trade tensions, or simply how the virus will evolve as schools try to reopen, there remain a host of uncertainties. With investors now enjoying year-to-date gains across many asset classes, they simply may not try to push their luck.

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