Morgan Stanley
Wealth Management

Don’t Be Fooled by the Latest Market Rebound

Nov 8, 2023

Many pundits are bullish on stocks, but there’s evidence that investors need to prepare for a less rosy scenario.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • The latest rebound in stocks reflects the bullish notion that the rate-hike cycle is over and corporate profit growth lies ahead.
  • However, risks remain of slowing economic growth along with persistent inflation. 
  • Consider defensive opportunities such as utilities and staples, and value plays in financials, U.S. small- and mid-cap stocks, and international equities.

After recently tumbling into “correction” territory, U.S. equities staged a strong rebound last week. The S&P 500 Index advanced 5.9%, its best weekly performance of the year, accompanied by a pullback in bond yields as the 10-year Treasury yield fell 26 basis points to 4.57%. Investors, it seems, may be looking forward to continued gains from here on, hoping to end the year with a “Santa Claus rally.”   

 

But what’s behind this latest bounce-back in stocks? It looks like the market zeroed in on the fact that the Federal Reserve left interest rates unchanged in its November meeting, keeping the target federal funds rate between 5.25% and 5.50%. With that, pundits and bullish investors were quick to return to the narrative that the rate-hiking cycle is now over, the inflation fight is won and growth in corporate profits lies ahead. Illustrating this point: The futures market is again pricing a whole percentage point of rate cuts in 2024.

 

Morgan Stanley’s Global Investment Committee, however, is less convinced. Certainly, we respect that the market, which represents the “wisdom of crowds,” has a good track record of projecting future reality over the long term. But in the short term, there’s still a lot of noise.

 

We believe it’s important to base our market analysis not just on moves at the aggregate index level, but on what we find beneath the surface and across asset classes. This approach continues to support our cautionary stance, in light of four observations.

  1. 1
    Potential slowing in economic growth:

    Despite blowout readings for third-quarter GDP, other data suggest a softening in economic activity. The Conference Board’s Leading Economic Index fell by a worse-than-expected 0.7% in September, marking its 18th straight month of declines. Manufacturing weakened sharply in October, according to the Institute for Supply Management’s index, and last week’s nonfarm payrolls report revealed a weaker-than-expected 150,000 new jobs in October and an uptick in the unemployment rate to 3.9%.

  2. 2
    A specter of “sticky” inflation:

    There’s been little improvement in certain key components of inflation, including wages and housing. The Employment Cost Index accelerated in the third quarter, rising 1.1%, while October jobs data showed wage gains are still running at a higher-than-expected 4.1% year-over-year. Housing prices gained further momentum, gaining an annualized 2.6% in August, according to the latest data from the CoreLogic S&P Case-Shiller Index. 

  3. 3
    A “sideways” stock market:

    Even with recent gains in equities, the overall direction in stock prices remains uninspiring. Market breadth and volumes remain weak, with the median stock having essentially gone nowhere since last May. Meanwhile, cyclical sectors such as consumer discretionary have underperformed their defensive counterparts such as utilities. Gold’s continued outperformance also suggests that we are still in a bear market. 

  4. 4
    Cracks in credit:

    Lastly, stresses are emerging in the weakest parts of high-yield, or “speculative grade,” credit. Data show a growing number of bankruptcy filings and weaker financing availability for small and medium-sized businesses, indicating the lagged effects of policy tightening may now be surfacing more visibly.

Given today’s risks and uncertainties, the Federal Reserve seems to be willing to take a wait-and-see approach, and we believe investors should do so as well.

 

While exercising patience, investors may consider using market volatility to execute tax-management strategies and rebalance portfolios toward investments that offer strong yields. Investors may also look at stocks with quality cash flows that are fairly priced based on achievable earnings targets. “Defensives” such as utilities and staples could provide ballast, and value-oriented opportunities are emerging among financials, U.S. small- and mid-cap stocks, and international equities.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from November 6, 2023, “Market Messages.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

Find a Financial Advisor, Branch and Private Wealth Advisor near you. 

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.

Wealth Management How to Weather the U.S. Stock Selloff Tightening financial conditions, persistent inflation and a mixed earnings outlook could make for more stock-market turbulence. Here’s how investors can prepare.
Wealth Management Investors Eye Risks as U.S. Debt Surges Swelling federal debt could spell trouble for markets and the economy. How can investors prepare?
Wealth Management Will Investor Optimism Hit a Fed Wall? Investors may need to reevaluate three key assumptions driving confidence for lower rates from the Fed.
Wealth Management DIY Investors: Why Choose a Morgan Stanley Financial Advisor Why DIY investors have confidence in the investing decisions they make together with a Morgan Stanley Financial Advisor. Get the facts.
How to Weather the U.S. Stock Selloff
Wealth Management How to Weather the U.S. Stock Selloff
Investors Eye Risks as U.S. Debt Surges
Wealth Management Investors Eye Risks as U.S. Debt Surges
Will Investor Optimism Hit a Fed Wall?
Wealth Management Will Investor Optimism Hit a Fed Wall?
DIY Investors: Why Choose a Morgan Stanley Financial Advisor
Wealth Management DIY Investors: Why Choose a Morgan Stanley Financial Advisor

More Insights

Discover more insights for your portfolio from Morgan Stanley. 

Wealth Management Portfolio Insights Thoughts on the Market

Index Definitions

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer.

High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.

Companies paying dividends can reduce or cut payouts at any time.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney LLC.

© 2023 Morgan Stanley Smith Barney LLC, Member SIPC.

CRC#6075481  (11/2023)

View Disclosures Close Disclosures