Veni
Equities will need a jolt from either the economy or the bond market to see more trading breadth, according to Morgan Stanley strategist Mike Wilson.
The “ongoing policy mix of heavy fiscal spending and tight interest rate policy is crowding out many companies and consumers in a way that is unsustainable, in our view,” Wilson wrote in a note.
“Investors have recognized this outcome by bidding up the few stocks of the companies that are doing well in this environment,” Wilson said. “Until the bond market pushes back via a higher term premium, or growth slows down in a more meaningful way, we expect this narrow market performance to persist.”
Economic growth surprise indices “have been trending lower all year, with the index making a new low this past week,” Wilson added. “So far, the S&P 500 (NYSEARCA:SPY) (IVV) (VOO) has taken the weaker data in its stride while treating bad economic data as still good for Large-Cap Quality stocks given expectations of Fed rate cuts.”
“Meanwhile, several other indices have broken down, with some now negative on the year.”
Wilson, who recently gave up his long-held bearish forecast for 2024, recommends a barbell position of large-cap quality growth stocks and defensive stocks, while fading cyclicals “and avoiding the temptation to play for a true broadening out.”
