Reuters/Brendan McDermid
- Morgan Stanley says the easy conditions enjoyed by stock traders over the past several years are rapidly coming to an end.
- The firm provides a specific forecast for when various asset classes will see their cyclical peaks - and spoiler alert, it's coming soon.
The past couple years have been exceedingly easy for investors.
It may not seem that way to traders who have battled on the front lines through rough patches and geopolitical scares, but Morgan Stanley says that once people have the benefit of hindsight, they'll realize just how perfect conditions were.
Let's take an inventory of all the positive forces that support this view: stronger-than-expected economic growth, surprisingly weak inflation, continued monetary accommodation, and positive policy action (in this case, the new tax law).
As Andrew Sheets, Morgan Stanley's chief cross-asset strategist, puts it, "one doesn't usually get all of those things together, and their confluence powered risk assets higher."
But, unfortunately for investors, the firm also says those easy gains are all but over.
Stocks have historically topped nine to 12 months after a trough in credit spreads, according to Morgan Stanley, which says such a bottom was reached in late January or early February. That, in turn, would mean equities are on pace to top around December of this year. The firm also notes 10-year Treasury yields tend to peak roughly three months before stocks, putting their top in September.
Morgan Stanley
Morgan Stanley has responded to its findings by reducing its net long equity exposure to 2%, down from 4%. After all, although he acknowledges it's "risky" to own stocks as they enter the final phase of a market cycle, Sheets doesn't want to miss out on the intermediate-term gains he expects them to generate.
While other pundits across Wall Street haven't issued such a specific timeframe for an equity market top, firms including Goldman Sachs and BlackRock have started highlighting what they see as slowing stock fundamentals.
Of particular concern is plateauing earnings growth. Richard Turnill, global chief investment strategist at BlackRock, said on Monday that "earnings are close to a peak," noting that the new tax law provided a one-time surge in profit estimates that will be impossible to surmount in the near future.
Goldman has similar thoughts. As pointed out by David Kostin, the firm's chief US equity strategist, "analysts do not expect the conditions that led to upside in 1Q EPS to persist for the remainder of the year."
None of this is intended to scare anyone at present time - nor should it stir up immediate worry. The bigger takeaway is that stock investors who have enjoyed such an easy run will now have to work a little harder to make money.
Only time will tell if they're up for the challenge.