Insight Article Desktop Banner
 
 
Takeaways & Key Expectations
  •  
Februar 17, 2023

Equity Market Commentary - February 2023

Insight Article Mobile Banner

Takeaways & Key Expectations

Equity Market Commentary - February 2023

Equity Market Commentary - February 2023

Share Icon

Februar 17, 2023

 
 

As I have repeated often, the only consistency to investing is human behavior. Economic and macro conditions influencing the market change constantly. How we react to those changes really does not.

Accurately predicting how evolving macro conditions will impact the market is virtually impossible to successfully repeat year-in and year-out.

Yet an understanding of these consistent behavioral patterns creates huge investment opportunities for investors who recognize them and have the emotional quotient to capitalize on them. It’s what we on the Applied Equity Team like to call, “the Fat Pitches”.

In my opinion, the consistency of behavior since the October low is about as textbook as it gets.

I believe we are in the process of traveling the four stages of the simple quote from Sir John Templeton in 1966:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

Overly simplistic? “Andrew, it has to be more complicated than this.”

Maybe not. Consider the following:

  1. The lead line of the January 4th Slimmon’s TAKE was “Pessimism is Rampant”. Historically after a nasty 25% decline in the S&P 500, as we experienced in 2022, the odds of a good year for stocks increases exponentially. But most investors did not see it that way.
  2. On our January 17th 2023 Market Outlook webcast, we quoted Barton Biggs, as we were convinced, “investors were still fighting last year’s war”. We saw four glaring signals that we believe indicated investors were way too bearish.
  3. To me, marking-to-market these four tell-tale behavioral signs from our webcast will assist in understanding what stage we are in today.
    1. Wall Street’s Strategists
      Where they were at the beginning of 2023:
      Wall Street’s strategists on average expected less than a 5% return for the 2023 year.1 Consensus of this group is a historically a strong contrarian signal.

      Where they are now:
      We are just starting to see strategists lift price targets, but only by a select few. Most remain convinced it’s a bear market rally and have not budged.
      Still in pessimistic stage.
    2. Economists
      Where they were at the beginning of 2023:
      According to the Philly Fed survey, in late 2022, most economists expected a recession in 2023. As the WSJ pointed out, we have never had a recession when a majority of economists expected one.


      Where they are now:
      As the February Global Fund Manager survey reported this week, expectations of a 2023 recession have fallen from 77% in November 2022 to 24%.2
      Exited pessimistic stage.

    3. Investor sentiment
      Where they were at the beginning of 2023:
      Investor sentiment at the outset of 2023 was just horrible. We saw record daily put volume3 in late December, and never before had the bull-to-bear spread spent so many weeks in the bearish camp. Massive contrarian signals.

      Where they are now:
      Sentiment is capitulating. Last week, AAII bullish sentiment rose to the highest since late December 2021, the first time in 58 weeks with higher bullish sentiment than average.4
      Exited pessimistic stage.
    4. Global allocators
      Where they were at the beginning of 2023:
      Institutional global allocators5 had gone overweight bonds versus equities at the end of 2022. As we showed, the history of this is a contrarian signal also. The last two times they went overweight bonds were in May 2020 and March 2009, and both times stocks had crushed bond returns by year-end.


      Where they are now:
      No signs of reallocation yet. They are still net 31% underweight equities.6
      Still in pessimistic stage.

    But with the market so strong YTD, now what?
  4. My conclusion:
    The first stage of a bull market, the pessimism stage, is largely complete. We are just entering the skepticism stage.

    While the media no longer laughs off any bullish commentary (as mentioned in the January 4th Slimmon’s TAKE), they still give more credence to the disbelieving bears than they do the bulls.


    As Bloomberg reported this past weekend:

    “Investors have pulled $31 billion from equity mutual funds in the past six weeks, the most to start a year since 2016 as investors are apprehensive and are not buying the 2023 rebound.”7


    To me, “apprehensive” sounds a lot like “skepticism”.
  5. One final tell-tale sign that we are only modestly into the skeptical stage:

    On virtually every presentation I have done over the last six weeks I have received this question: “Why would I invest in equities with so much uncertainty when I can get 4.5% ‘risk-free’?”

    It is only in the early stages of a bull market when the pains of losing money are still so raw that 4.5% looks attractive. In the later stages of a bull market, 4.5% feels underwhelming.

    Yes, with the S&P 500 up 7.4% YTD, 4.5% does not look bad. However, if and when the market breaches the double-digit return level, anxiety will likely build quickly.
  6. I do not believe the Presidential cycle gets enough respect.

    Too simplistic? Maybe not.
    1. As we discussed on the webcast, Q1 of a pre-election year has historically been the best quarter of the 16 Presidential quarters. That’s this quarter. And Q2 has been excellent also.
    2. Since 1942, the market has ALWAYS been up from the mid-term elections over the next 12 months.
    3. The US economy has NEVER had a recession in the 3rd year of a Presidential term.8

    Why are the statistics so consistent? Because politicians want the economy humming along heading into an election year. Monetary and fiscal policy loosen up in order to accelerate the economy, and stocks reprice to reflect a change in growth expectations. I think 2023 will be a textbook case of the Presidential cycle.
  7. To be bearish, one needs to ignore the underlying messages of the market. During the rallies experienced in 2022, which were the precursors to two nasty spills, defensive stocks were the leaders. Utilities consistently did well.

    This is a very different setup than 2023, where defensives, especially those same utilities, are getting walloped, and cyclical stocks are showing leadership, which is a far healthier sign. To be bearish, in my opinion, one must believe the market has it wrong. It is always dangerous to think you are smarter than Mr. Market.

    Or, as my personal favorite CNBC commentator Rick Santelli (a noted Chicago bias here) said recently, in his typical pugnacious way, to a panel of bearish economists/strategists, “Who has a better track record? You or the markets?”9
  8. To repeat from the webcast, as much as Applied Equity Advisors is confident that the first half of this year is going to be strong, it’s too early to understand the ramifications of the Fed tightening. Yes, the yield curve inversion is good at predicting an economic slowdown, but it is not great at predicting when a slowdown will occur. 2024? 2025? Time will tell.
  9. Finally, let’s get back to those Fat Pitches. For our US Core, Global Core and Global Concentrated strategies, the pessimism stage tends to offer the most Fat Pitches. Many of these opportunities have started to come our way in 2023, as evidenced by our performance. However, just like with the market overall, it’s still the early stages.

    We’ll detail these in the next Slimmon Take, expected early next week.
 
 

The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See Disclosure section for index definitions

1 Fundstrat, Bloomberg.
2 Bank of America. February 2023.
3 Bloomberg.
4 Factset Market Intelligence February 14th, 2023
5 BofAGlobal Fund Manager Survey.
6 Factset Market Intelligence. February 15th, 2023.
7 Bloomberg, February 11, 2023.
8 Strategas, February 15th, 2023.
9 CNBC, February 14, 2023.

 
andrew.slimmon
Head of Applied Equity Advisors Team
Applied Equity Advisors Team
 
 
 
 
 
 
 

RISK CONSIDERATIONS

THERE IS NO ASSURANCE THAT A PORTFOLIO WILL ACHIEVE ITS INVESTMENT OBJECTIVE. PORTFOLIOS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE PORTFOLIO WILL DECLINE AND MAY THEREFORE BE LESS THAN WHAT YOU PAID FOR THEM. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS PORTFOLIO. PLEASE BE AWARE THAT THIS PORTFOLIO MAY BE SUBJECT TO CERTAIN ADDITIONAL RISKS. IN GENERAL, EQUITIES SECURITIES’ VALUES ALSO FLUCTUATE IN RESPONSE TO ACTIVITIES SPECIFIC TO A COMPANY. STOCKS OF SMALL-AND MEDIUM- CAPITALIZATION COMPANIES ENTAIL SPECIAL RISKS, SUCH AS LIMITED PRODUCT LINES, MARKETS AND FINANCIAL RESOURCES, AND GREATER MARKET VOLATILITY THAN SECURITIES OF LARGER, MORE ESTABLISHED COMPANIES. INVESTMENTS IN FOREIGN MARKETS ENTAIL SPECIAL RISKS SUCH AS CURRENCY, POLITICAL, ECONOMIC, MARKET AND LIQUIDITY RISKS. ILLIQUID SECURITIES MAY BE MORE DIFFICULT TO SELL AND VALUE THAN PUBLICLY TRADED SECURITIES (LIQUIDITY RISK). NON-DIVERSIFIED PORTFOLIOS OFTEN INVEST IN A MORE LIMITED NUMBER OF ISSUERS. AS SUCH, CHANGES IN THE FINANCIAL CONDITION OR MARKET VALUE OF A SINGLE ISSUER MAY CAUSE GREATER VOLATILITY.

DEFINITIONS

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. The S&P 500® Index measures performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. market, including 500 leading companies in the U.S. economy. The Russell 1000 Index is an index of approximately 1,000 of the largest companies in the U.S. equity market. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization.

The Russell 1000 typically comprises approximately 90% of the total market capitalization of all listed U.S. stocks. The Russell 1000® Growth Index measures the performance of the large- cap growth segment of the US equity universe. It includes those Russell 1000 companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 years). The Russell 1000® Value Index measures the performance of the large- cap value segment of the US equity universe. It includes those Russell. 1000 companies with relatively lower price-to-book ratios, lower I/B/E/S. The MSCI World Index is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term "free float" represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in

U.S. dollars and assumes reinvestment of net dividends. The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe. The Shanghai Composite Index is a capitalization-weighted stock market index designed to track the price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. Standard deviation is a measure that is used to quantify the amount of variation or dispersion of a set of data values.

IMPORTANT INFORMATION

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the particular Strategy may include securities that may not necessarily track the performance of a particular index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required.

For important information about the investment managers, please refer to Form ADV Part 2.

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation.

The Firm has not authorised financial intermediaries to use and to distribute this material, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this material is appropriate for any person to whom they provide this material in view of that person’s circumstances and purpose. The Firm shall not be liable for, and accepts no liability for, the use or misuse of this material by any such financial intermediary.

This material may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this material in another language, the English version shall prevail.

The whole or any part of this material may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without the Firm’s express written consent. This material may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law.

DISTRIBUTION

This material is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

MSIM, the asset management division of Morgan Stanley (NYSE: MS), and its affiliates have arrangements in place to market each other’s products and services. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. MSIM’s affiliates are: Eaton Vance Management (International) Limited, Eaton Vance Advisers International Ltd, Calvert Research and Management, Eaton Vance Management, Parametric Portfolio Associates LLC, and Atlanta Capital Management LLC.

This material has been issued by any one or more of the following entities:

EMEA:

This material is for Professional Clients/Accredited Investors only.

In the EU, MSIM and Eaton Vance materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central

Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland.

Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht ("FINMA"). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.

Outside the US and EU, Eaton Vance materials are issued by Eaton Vance Management (International) Limited (“EVMI”) 125 Old Broad Street, London, EC2N 1AR, UK, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: MSIM FMIL (Ireland) Limited Frankfurt Branch, Große Gallusstraße 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Denmark: MSIM FMIL (Copenhagen Branch), Gorrissen Federspiel, Axel Towers, Axeltorv2, 1609 Copenhagen V, Denmark.

MIDDLE EAST

Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 7097158).

U.S.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A BANK DEPOSIT

Canada: For use only with “Permitted Clients” under Canadian Law and may not be used with the general public. This presentation is communicated in Canada by Morgan Stanley Investment Management Inc. (“MSIM”), which conducts its activities in Canada pursuant to the international adviser exemption and International Investment Fund Manager Exemption. This presentation does not constitute an offer to provide investment advisory available. MSIM may only advise separately managed accounts of “Permitted Clients” and may only manage accounts which invest in non-Canadian issuers. “Permitted clients” as defined under Canadian National Instrument 31-103 generally include Canadian financial institutions or individuals with $5 million (CAD) in financial assets and entities with at least $25 million (CAD) in net assets. Permitted Clients may only invest in a separately managed account referenced in this presentation by entering into an investment management agreement with MSIM, of which this presentation is not a part. Materials which describe the investment expertise, strategies and/or other aspects of MSIM- managed separately managed accounts may be provided to you upon request for your consideration of the available investment advisory services offered by MSIM. MSIM and certain of its affiliates may serve as the portfolio manager to separately managed accounts described in this presentation and may be entitled to receive fees in connection therewith.

Latin America (Brazil, Chile Colombia, Mexico, Peru, and Uruguay)

This material is for use with an institutional investor or a qualified investor only. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party. This material is provided for informational purposes only and does not constitute a public offering, solicitation or recommendation to buy or sell for any product, service, security and/or strategy. A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence.

ASIA PACIFIC:

Hong Kong: This material is disseminated by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this material have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This material is disseminated by Morgan Stanley Investment Management Company and should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This material is provided by Morgan Stanley Investment Management (Australia) Pty Ltd ABN 22122040037, AFSL No. 314182 and its affiliates and does not constitute an offer of interests. Morgan Stanley Investment Management (Australia) Pty Limited arranges for MSIM affiliates to provide financial services to Australian wholesale clients. Interests will only be offered in circumstances under which no disclosure is required under the Corporations Act 2001 (Cth) (the “Corporations Act”). Any offer of interests will not purport to be an offer of interests in circumstances under which disclosure is required under the Corporations Act and will only be made to persons who qualify as a “wholesale client” (as defined in the Corporations Act). This material will not be lodged with the Australian Securities and Investments Commission.

Japan: For professional investors, this material is circulated or distributed for informational purposes only. For those who are not professional investors, this material is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This material is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

 

Dieses Dokument ist ein Marketingdokument.

Nutzer müssen die Nutzungsbedingungen lesen und akzeptieren, da in diesen bestimmte gesetzliche und regulatorische Auflagen enthalten sind, die für die Verbreitung von Informationen zu den Anlageprodukten von Morgan Stanley Investment Management gelten.

Die auf dieser Website beschriebenen Dienstleistungen sind unter Umständen nicht in allen Rechtsgebieten oder für alle Kunden verfügbar. Weitere Einzelheiten können aus unseren Nutzungsbedingungen entnommen werden.


Datenschutz    •    Nutzungsbedingungen

©  Morgan Stanley. Alle Rechte vorbehalten.