Insight Article Desktop Banner
 
 
Takeaways & Key Expectations
  •  
août 14, 2023

Equity Market Commentary - August 2023

Insight Article Mobile Banner

Takeaways & Key Expectations

Equity Market Commentary - August 2023

Equity Market Commentary - August 2023

Share Icon

août 14, 2023

 
 

We listen to you!

One of the many aspects of this business I love is the relationship between corporate fundamentals and behavioral finance and its net impact on stock prices. Anyone who follows us is likely aware of that.

As it pertains to corporate fundamentals, my team and I spend a huge portion of our day listening to calls, reading reports, and analysing companies.

On the behavioral side, I am enormously fortunate to have such a great group of readers who are on the front lines working with clients directly. I greatly value their feedback.

What does that have to do with this Slimmon’s TAKE?

  1. Last month, I released a Market Alert warning of the dangers of August/September seasonality. The equity market was up significantly year-to-date; sentiment and complacency (lack of volatility) had soared; and the riskiest stocks had performed the best. This is never a good sign, particularly as we enter the slowest corporate news flow period of the year.
  2. However, as I said then, “talk is cheap.” Watch what people do, not what they say. As much as retail investors say they are more bullish; they are not acting upon it. Easy to see, simply by going to the Investment Company Institute website and looking at ETF and mutual fund flows.1
  3. Anecdotally, the #1 most frequently asked question I have received this year is: “When is the correction coming? I have cash to invest.”
  4. Therefore, I have questioned how much of a correction the market will provide when so many want a good entry point. Won’t pullbacks offer an opportunity for that cash on the sidelines to be invested, thereby cushioning the downside?
  5. Yet, while institutions have increased their equity allocations (hence why the market has rallied), retail is traditionally last to the party. The data tells us they have not shown up yet.

When Leslie or I receive consistent feedback from those of you on the front lines, we listen:

  1. Here is a portion of an email response to July’s Market Alert I received:

    Andrew, FOMO (Fear of Missing Out) amongst my clients is not in equities, it’s in bonds.
  2. Here’s the summary of a conversation Leslie had:

    He disagreed with Andrew on one point from the Market Alert. He thinks clients are happy with a 5% savings return, and until the Fed eases, they won’t move cash into equities.

Those are just two of many comments.

Let’s rewind back to February 2021 when, after 11 months of selling equities off the covid-lows and a 66% rally in the S&P 500, retail fund flows turned positive. Investors decided to show up to the party.

Now, fast forward to last year’s bear market. Flows turned consistently negative in September 2022 and have remained so despite a 26% rally off the October 12th, 2022, low.2

Therefore, I assumed that given we are nearing the one-year anniversary of “selling after a bear market”, it was time for investors to flip, as they did in 2021.

However, I neglected to factor in one key difference that many of you have pointed out:

  • In February 2021, 3-month Treasury bills were yielding only 0.05%. Today they yield 5.36%.3

The pain of missing out on the equity rally and sitting with cash was far more acute in 2021 than it is today.

In my opinion, there are two implications:

  1. Short-term drawdowns may not be supported by an influx of cash buying into the correction. In fact, seasonality is historically more volatile than normal when the S&P 500 is more richly priced and the 10-year Treasury yield is at its highest level in a year, as both are now.4
  2. Ultimately, stocks need to go even higher for the pain threshold to become unbearable and FOMO to kick in.

Could #2 possibly be wrong and retail investors will simply miss out on this rally altogether?

As I often say, the only consistency to the investing business is the fear-to-greed-to-fear cycle. To say the greed part of the cycle will not emerge at some point is to say, “this time is different”. It simply must happen.

However, maybe we are not yet at that February 2021 juncture?

The only question in my mind is, how much does the equity market need to move up before a 5.25% in Treasury yield starts to look less attractive in comparison, thereby unleashing that cash? (Feel free to weigh in with an opinion!)

My thesis that equities will be higher into year-end is also predicated on the positive inflection in quarterly year-over-year earnings growth.

As I pointed out in our January webcast, stocks rally in down earnings years, most of the time. But why? Two reasons:

  1. They sell off the year prior in anticipation of a down earnings year. (Check the box on 2022).
  2. They rally in the second half of the year in anticipation that the next year will be better.

I think it’s quite likely #2 is yet to come. The bottom-up 2023 consensus estimates went up after the Q2 earnings season, not down as the bears had predicted.5

That’s important because consensus is estimating a 12% earnings recovery next year from $220 to $246. And given Q2 came in strong, there were no cuts to that $246 estimate.

As it appears today, the S&P 500 will inflect from -6% year-over-year negative earnings growth in Q2 to +8% year-over-year positive earnings growth in Q4.

Negative to positive inflections tend to be greeted warmly by investors.

But that is not the only potential catalyst for equities later this year.

The other big one is old Joe in the White House, who will be running for re-election next year. Remember that our President has been in DC for 50 years. He knows it’s all about “the economy, stupid” in the year of the election.

Old Joe understands he needs to pump the economy next year. As Dan Clifton, Washington strategist at Strategas writes:

“Biden’s big spending initiatives: Infrastructure, Clean Energy and Chips do not Kick in until 2024.”6

We hear this from our infrastructure plays. They are all awaiting the billions of earmarked infrastructure money, expecting to see flows really turn on early next year.

Meanwhile, when asked about the $52.7 billion Chips Act, Secretary of Commerce Raimondo said just recently:

We will start to give out the money later (Q4) this year.7

These public works programs should be big kickers for industrials, materials, semi-equipment, and other sectors. Not to mention, despite the debt ceiling etc., I expect the President, will find further ways to ingratiate himself to voters. $$$

In conclusion:

  1. Retail has not capitulated and invested what they previously pulled……. yet.
  2. Earnings growth is inflecting positively.
  3. Another wave of already approved fiscal spending is around the corner.

Hence, we remain confident on the rest of the year, although I concede, we are wary from now until Q4. The market could be more volatile than I had previously anticipated. The bears have been put through the ringer and are perhaps due for a respite.

Finally, I want to address a comment I hear often, with which I take issue: “Stocks are Expensive.”

As you can see from the following chart, yes, the S&P 500 is more expensive than its average.

However, that’s only because a few big names are pulling up the numbers.

Most stocks in the S&P 500 are cheaper than average, as evidenced by the S&P 500 equal-weight index. The same is the case for both mid-caps and small-caps.

Obviously, P/E is just one metric to use. Yet there are plenty of fertile equity opportunities out there. Do not let blanket statements by the bear crowd scare you.

 
 
 
 
 

As hard as it might be to believe, given the run in the mega-caps, the S&P 500 equal-weight has outperformed the S&P 500 over time.8

That is why our US Core, and the US portion of our global products not only have exposure to the mega-caps but also to the mid-caps within the S&P 500.

No doubt, having more S&P 500 equal-weight exposure has been painful YTD, given the tremendous outperformance of the mega-caps.

However, we believe the combination of cheaper valuations and some reversion to the mean (time for the rest of the market to catch up) does give us confidence looking forward.

Andrew


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.

 
 

1 https://www.ici.org/research/stats/weekly-combined
2 Bloomberg as of August 8th, 2023.
3 Bloomberg as of August 8th, 2023.
4 Sentiment Trader. August 9th, 2023.
5 Factset as of August 4th
6 Strategas, August 8th, 2024.
7 CNBC, August 9th, 2023
8 Since 1989, the SPX equal-weighed total return index has compounded at 11.03% annualized versus 10.11% for the SPX. Bloomberg, August 8th, 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.

INDEX 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.

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.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

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.

Eaton Vance is part of Morgan Stanley Investment Management. Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

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, Atlanta Capital Management LLC, Eaton Vance Management International (Asia) Pte. Ltd.

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 24-26 City Quay, Dublin 2, DO2 NY19, 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)14 709 7158).

This document is distributed in the Dubai International Financial Centre by Morgan Stanley Investment Management Limited (Representative Office), an entity regulated by the Dubai Financial Services Authority (“DFSA”). It is intended for use by professional clients and market counterparties only. This document is not intended for distribution to retail clients, and retail clients should not act upon the information contained in this document. 

This document relates to a financial product which is not subject to any form of regulation or approval by the DFSA. The DFSA has no responsibility for reviewing or verifying any documents in connection with this financial product. Accordingly, the DFSA has not approved this document or any other associated documents nor taken any steps to verify the information set out in this document, and has no responsibility for it. The financial product to which this document relates may be illiquid and/or subject to restrictions on its resale or transfer. Prospective purchasers should conduct their own due diligence on the financial product. If you do not understand the contents of this document, you should consult an authorised financial adviser.

U.S.

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

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus for the Morgan Stanley Funds please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.

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 has been issued 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 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. Eaton Vance Management International (Asia) Pte. Ltd. (“EVMIA”) holds a Capital Markets Licence under the Securities and Futures Act of Singapore (“SFA”) to conduct, among others, fund management, is an exempt Financial Adviser pursuant to the Financial Adviser Act Section 23(1)(d) and is regulated by the Monetary Authority of Singapore (“MAS”). Eaton Vance Management, Eaton Vance Management (International) Limited and Parametric Portfolio Associates® LLC holds an exemption under Paragraph 9, 3rd Schedule to the SFA in Singapore to conduct fund management activities under an arrangement with EVMIA and subject to certain conditions. None of the other Eaton Vance group entities or affiliates holds any licences, approvals or authorisations in Singapore to conduct any regulated or licensable activities and nothing in this material shall constitute or be construed as these entities or affiliates holding themselves out to be licensed, approved, authorised or regulated in Singapore, or offering or marketing their services or products. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. EVMI is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of the provision of financial services to wholesale clients as defined in the Corporations Act 2001 (Cth) and as per the ASIC Corporations (Repeal and Transitional) Instrument 2016/396. Calvert Research and Management, ARBN 635 157 434 is regulated by the U.S. Securities and Exchange Commission under U.S. laws which differ from Australian laws. Calvert Research and Management is exempt from the requirement to hold an Australian financial services licence in accordance with class order 03/1100 in respect of the provision of financial services to wholesale clients in Australia.

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.

 

Ce document est une communication promotionnelle.

Les utilisateurs sont invités à prendre connaissance des Conditions d’utilisation avant d’engager toute procédure, car celles-ci mentionnent des restrictions légales et réglementaires applicables à la diffusion des informations relatives aux produits d’investissement de Morgan Stanley Investment Management.

Les services décrits sur ce site Web peuvent ne pas être disponibles dans certaines juridictions ou pour certaines personnes. Merci de consulter nos Conditions d’utilisation pour de plus amples informations.


Confidentialité    •    Your Privacy Choices Your Privacy Choices Icon    •    Conditions d'utilisation

©  Morgan Stanley. Tous droits réservés.