Global Multi Asset Thought of the Week

•

October 22, 2024

The Most Contrarian Outcome - No Landing

October 22, 2024

The Most Contrarian Outcome - No Landing

Global Multi Asset Thought of the Week

The Most Contrarian Outcome - No Landing

October 22, 2024

Given a strong consensus for a Soft Landing and lingering Recession fears, No Landing would be the most contrarian scenario for markets. In fact, there are some hints that the dichotomy between strong spending and weak labor markets could resolve in favor of No Landing. Rates and some segments of the equity markets have overpriced a Soft Landing and would be vulnerable in this scenario.

Recession risks have been top of mind since early 2022¹ when headline inflation reached 9%, the Fed hiked 525 basis points (bps) in 18 months (the steepest pace in 40 years) and the yield curve inverted by more than 100 bps. Such steep inversion has been a precursor to recession in the following year every time in the past six decades. But the U.S. economy exceeded the consensus and our expectations in late 2022, 2023 and the first half of 2024, averaging 2.3% annual growth. Despite this, today the overwhelming majority of investors (79%) still expect a Soft Landing (i.e. sub-trend growth) in the next year, and 11% expect Recession (Display 1).² In fact, the most contrarian outcome for markets would be No Landing (i.e. above trend growth).

DISPLAY 1

Few Investors Expect No Landing

Source: MSIM Global Multi-Asset Team Analysis, FactSet, Haver Analytics and Bank of Americas. Data as of September 26, 2024.

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. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

Recently, cautiousness on the economy has been driven by weakening labor market data, but households are consuming and businesses are investing.³ The consensus will likely face another positive surprise in Q3 with GDP likely to hit 3% vs 2% currently expected.⁴ And there are some indications that the dichotomy between a weak labor market and strong spending could resolve in favor of the latter:

LABOR MARKET STABILIZATION: Job openings have been stabilizing for the past four months to September 20th based on data from Indeed.com. This is confirmed by JOLTS (Job Openings and Labor Turnover Survey) data through August (Display 2). In addition, wages for new Indeed.com postings rebounded to +3.3% from +3.1% in the spring.⁵

DISPLAY 2

Job Openings Beginning to Stabilize

Source: MSIM Global Multi-Asset Team Analysis, FactSet, Haver Analytics and Bank of Americas. Data as of September 26, 2024.

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. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

IMPROVING HOUSING ACTIVITY: Mortgage rates are down nearly 180 bps from the October 2023 peak of 7.90% (Display 3). As a result, new home sales rebounded more than 10% in the past 7 months,⁶ permits for new construction are improving and mortgage applications and are up 11% from a year ago.⁷

DISPLAY 3

Falling Mortgage Rates Support Housing Market

Source: MSIM Global Multi-Asset Team Analysis, FactSet, Haver Analytics and Bank of Americas. Data as of September 26, 2024.

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. Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass.

CONSUMERS HAVE MORE DRY POWDER THAN EXPECTED: the annual update from the Bureau of Economic Analysis (BEA) revealed that the latest quarterly household savings rate is 5.2% (not 3.3% as previously thought) given higher estimated income.

Of course, these are still only hints of stabilization in the labor market and of recovery in housing, and other risks to the economy remain, such as still-high rates and a likely drop in government-driven activity. Nonetheless, No Landing would likely be a significant surprise to markets. In particular:

TOO MANY FED CUTS PRICED IN: In a higher than expected growth (and inflation) environment, the Fed may only need to cut rates to 3.5%-4%, implying a 10-year yield of 4.0-4.25% (vs. 3.74% currently) and TIPS closer to 1.8-2% (1.55% currently).⁸ Some speculative areas in the market which have benefited from the expectation of much lower rates, such as gold (and cryptocurrencies to a certain extent), might also come under pressure.
EXPENSIVE DEFENSIVES AT RISK: In a No Landing scenario, the equity market’s bias towards defensiveness and away from cyclicals might come under pressure. And the bias for large cap, expensive, quality stocks, might shift towards lower quality stocks at lower multiples, in neglected areas like small caps and value.
On the other hand, current investor preference for U.S. over international assets could stay well-supported, though record valuations are already worrisome.

Bottom Line: Given a strong consensus for a Soft Landing and lingering Recession fears, No Landing would be the most contrarian scenario for markets. In fact, there are some hints that the dichotomy between strong spending and weak labor markets could resolve in favor of No Landing. Rates and some segments of the equity markets have overpriced a Soft Landing and would be vulnerable in this scenario.

Download PDF

¹ According to the Wall Street Journal survey of economists, the estimated probability of recession over the next 12-months remained near or above 50% from July 2022 to October 2023.
² Bank of America Global Fund Manager Survey – September 17, 2024. 40% of investors surveyed see a US recession as the biggest tail risk, more than twice as many who see an inflation reacceleration as the key tail risk.
³ Based on the latest retail sales, consumption may grow 3.5% in 3Q, and spending by businesses on equipment and intellectual property is expected to grow 8-9%.
⁴ The Atlanta Fed’s GDPNow forecasts 3.1% for Q3 and the New York Fed’s NowCast 3.0%.
⁵ Indeed.com
⁶ New home sales have increased +11% smoothed three months and +8% unsmoothed (Jan – Aug 2024)
⁷ Permits for new home construction are up 2% from July, based on a trailing 3-month average. Mortgage applications data is trailing 4-week average.
⁸ The Fed’s SEP (Statement of Economic Projections) indicate that the long-term equilibrium Fed Funds rate is 2.875% while rates markets have priced 2.85% Fed Funds by September 2025.

Select Author(s) For Icon

Right Click Edit

Select Strategy(s)

Right Click Edit

Related Insights

Global Multi Asset Thought of the Week

China: Smoke and Mirrors

07-Nov-2024

Chinese stocks low multiples do not represent a compelling overweight until policy measures sufficient to solve its debt deflation problems are implemented.

Global Multi-Asset Viewpoint

Inflation Outlook – One Year Later

31-Jul-2021

MSIM’s Global Multi-Asset Team discusses their investment perspective in the latest viewpoint: "Inflation Outlook – One Year Later"

Global Multi-Asset Viewpoint

What’s in Store for Real Rates in the U.S.?

20-Feb-2021

MSIM’s Global Multi-Asset Team discusses their investment perspective in the latest viewpoint: “What’s in Store for Real Rates in the U.S.?"

IMPORTANT DISCLOSURES

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. 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.

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 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, 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 DEPOSIT

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.

People’s Republic of China: For information purposes only and should not be construed as legal, tax or investment advice nor as an offer or solicitation to buy or sell any securities, any interest in securities or any other instrument. This document does not constitute a public offer of investment, whether by sale or subscription, in the People’s Republic of China (PRC). Persons who come into possession of this information are required to observe this restriction and obtain any applicable regulatory approvals prior to making any investment decisions.

Taiwan: This material is provided for information purposes only and does not constitute a solicitation where such a solicitation is unlawful. The products mentioned herein this material may or may not have been registered with the Securities and Futures Bureau of the Financial Supervisory Commission in Taiwan, Republic of China (“ROC”) pursuant to relevant securities laws and regulations. Such products may only be made available in the ROC if they are (a) registered for public sale in the ROC or (b) availed on a private placement basis to specified financial institutions and other entities and individuals meeting specific criteria pursuant to the private placement provisions of the ROC Rules Governing Offshore Funds.

Korea: This material is not, and under no circumstances is to be construed as an offering of securities in Korea. No representation is being made with respect to the eligibility of any recipients of this material under the laws of Korea, including but without limitation, the Foreign Exchange Transaction Law and Regulations thereunder. The Fund’s mentioned herein this material may or may not have been registered with the Financial Services Commission of Korea under the Financial Investment Services and Capital Markets Act and may not be offered directly or indirectly, in Korea or to any resident of Korea except pursuant to applicable laws and regulations of Korea.