Thoughts on the Market

Investors’ renewed concerns around the banking system should have a variety of impacts on fixed-income investment.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Thursday, March 16th at 11 a.m. in New York. It's a volatile moment in markets, with investors grappling with complicated questions around the failure of Silicon Valley Bank. That event has naturally led to concerns about broader challenges to the banking system and potential impacts to the path for monetary policy. Here's what we think fixed income investors need to know in the near-term. Our banking analysts and economists have concluded that the U.S. banking system is more constrained. The causes of the Silicon Valley Bank situation will likely cause banks and their regulators to think differently about capital, causing lending growth to decline more than expected this year. That, in turn, should put pressure on the labor market and therefore the general U.S. economic outlook. We expect this dynamic will influence the U.S. bond market in the following ways in the near-term. For treasuries, we believe yields will be biased lower, because while the data still shows inflation pressures have persisted, that may take a backseat to financial stability concerns in the minds of investors. For corporate credit, there may be some near-term underperformance, given the market features a heavy weighting towards bonds issued by U.S. banks. In MUNI's, our team doesn't expect them to outperform in the near-term as the kind of interest rate volatility caused by recent events historically has been a headwind to the asset class. But a bright spot might be agency mortgage bonds, where our colleagues see room for compression in yields relative to treasuries. Those levels, which are near COVID crisis levels, perhaps overcompensate for fears that banks may have to sell their portfolios of similar bonds. So that's what's going on in the near-term, but my colleagues and I will be back here frequently to give you some longer term perspective. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As cryptocurrency has seen some of its major players topple, policy makers have set their sights on regulation. So what are some of the possible scenarios for crypto policy? U.S. Public Policy Researcher Ariana Salvatore and Head of Cryptocurrency Research Sheena Shah discuss.Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets. Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore from Morgan Stanley's U.S. Public Policy Research Team. Sheena Shah: And I'm Sheena Shah, Head of the Cryptocurrency Research Team. Ariana Salvatore: And on this special episode of the podcast, we'll focus on the issue of cryptocurrency regulation. It's Wednesday, March 15 at 10 a.m. in New York. Sheena Shah: And 2 p.m. in London. Ariana Salvatore: The recent news about the U.S. banking system has brought even more focus on the cryptocurrency markets. Our listeners may have heard about a series of insolvencies and collapses of major crypto players last year, with the most notable being the FTX exchange. These events have raised concerns among policymakers and are signaling a need to regulate cryptocurrencies as a means of protecting investors. Sheena, before we dig into any potential regulatory path for crypto from here, I think it's important to try to get a grip on a question that might seem basic, but in fact is one that policymakers have actually been grappling with for quite some time. And that is, what is a cryptocurrency from a regulatory perspective. Is it a security or is it a commodity? How should it be classified from a regulatory perspective? Sheena Shah: So cryptos could be classified as many things: securities, commodities, currencies, or even something else. But the U.S. regulators are making their view very clear. The SEC is saying every crypto apart from Bitcoin is a security. The definition will determine what products can be offered, which companies can offer them, which regulator will be in charge and maybe even how transactions are taxed. There is agreement that Bitcoin should be classified as a commodity, partly due to its decentralized nature, and no regulator is classifying Bitcoin as a currency as this would admit that it's a direct competitor with the U.S. dollar. Ariana Salvatore: Got it. So taking a step back for a second, cryptocurrencies up until this point have been largely unregulated and volatility is obviously nothing new in the space. What has been happening in crypto markets lately that's just now suggesting a need for regulation? Sheena Shah: Well, last year crypto prices were in a bear market and the collapse of the FTX exchange just increased the politician interest in this area. Trading data tell us that the average U.

While oil and gas prices generally move in similar directions, their current situation has deviated from market norms.----- Transcript -----Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodities Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll give you an update on the global oil and gas markets. It's Tuesday, March 14th at 2 p.m. in London. Energy markets are currently confronted with an unusual situation: usually oil and gas prices move in similar directions, but at the moment they have quite different prospects. Let's start with the global gas market, that is the gas market outside the United States, which has its own dynamic. Over the last 12 months, the center of activity in global gas has been Europe. This time last year, Europe still received close to 400 million cubic meters a day of natural gas from Russia. Over last summer, this fell by around 90% to just a trickle, causing a severe spike in European gas prices. At the time, we argued that gas prices needed to rise to drive demand destruction and attract LNG, that is liquefied natural gas that can be transported on tankers, to Europe. Prices indeed rose. By August, European gas prices reached over €300 per megawatt hour, that is more than 20x their normal level. Since then, the European gas market has seen the most dramatic turn around. For starters, demand destruction has been far greater than expected. Warm weather has helped, but that has certainly not been the main driver. At the same time, LNG imports into Europe have risen to levels that seemed unlikely this time last year. Remarkably, European gas prices have been declining for some time already, but energy imports just keep coming. The European gas market now faces the surprising situation that if demand stays as weak as it currently is, and LNG imports continue at the level of the last few months, inventories could fill over the summer to such an extent that Europe could run out of physical storage capacity sometime around August. In the space of a few months, the European gas market has gone from worrying about what commodity analysts call 'tank bottoms', to now concern over 'tank tops'. To prevent overstocking this summer, European gas prices probably need to fall further to send a signal to LNG suppliers that they need to send at least some of their energy cargoes elsewhere. However, that then creates a better supply situation elsewhere in the LNG market, putting downward pressure on prices there too. In contrast, the oil market presents a very different picture. Oil prices also gave up a large part of their gains late last year as the market worried about recession. However, even at the point when 70% of bank economists consensually forecast a recession, Brent crude oil did not fall much below $80 a barrel. At the moment, the oil market is modestly oversupplied, which is not uncommon for this time of the year. However, from here, the oil market has several tailwinds. First is another year of recovery in aviation, which is likely to drive growth and jet fuel consumption. Second is China's reopening. While there may be some concern in other markets over the impact of China's reopening, in the oil market the indications so far have simply been positive. And finally, there is supply risk for Russia. Although oil exports from Russia have continued, a lot of this oil is piling up at sea. That cannot continue at the current pace for very long and we would still estimate that Russian oil exports will eventually come under some pressure as the year progresses. Put these factors together and the oil market will likely come into balance in 2Q and reenter a deficit once again in the third and fourth quarter. Inventories are already low and likely to decline further in the second half. Spare capacity in OPEC is still very limited and investment levels have been modest in recent years. As the oil market tightens, prices are likely to find their way higher again. In inflation adjusted terms the average oil price over the last 15 years is $93 a barrel. This is not a market where oil prices should be below the historic average. In fact, we'd argue the opposite. As mentioned, oil and gas prices usually move in similar directions, but so far this year they have already diverged quite substantially. Given the current outlook, we think these trends have further to run- global gas faces headwinds, but oil is likely to find its way higher again later this year. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Banking news and other market pressures are leading some depositors to move funds from traditional banks to higher-yielding securities. How will this affect economic growth and equity prices?----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 13th at 11 a.m. in New York. So let's get after it. The speed and size of the Silicon Valley bank wind down over the last week was startling to many investors, even those who have been negative on the stock for months on the basis of exactly what transpired- a classic mismatch between assets and liabilities and risk taking beyond what a typical depositor does. To be clear about our view, we do not think there's a systemic issue plaguing the entire banking system, like in 2007 to 2009, particularly with the FDIC decision to backstop uninsured deposits. However, last week's events are likely to have a negative impact on economic growth at a time when growth is already waning in many parts of the economy. Rather than do a forensic autopsy of what happened at Silicon Valley and other banks, I will instead focus my comments and what it may mean for equity prices more broadly. First, I would remind listeners that Fed policy works with long and variable lags. Second, the pace of Fed tightening over the past year is unprecedented when one considers the Fed has also been engaged in aggressive quantitative tightening. Third, the focus on market based measures of financial conditions, like stock and bond prices, may have lulled both investors and the Fed itself into thinking policy tightening had not yet gone far enough. Meanwhile, more traditional measures like the yield curve have been flashing warnings for the past 6 months, closing last week near its lowest point of the cycle. From a bank's perspective, such an inversion usually means it's more difficult to make new profitable loans, and new credit is how money supply expands. However, over the past year, bank funding costs have not kept pace with the higher Fed funds rate, allowing banks to create credit at profitable net interest margins. In short, most banks have been paying well below market rates, like T-bills, because depositors have been slow to realize they can get much better rates elsewhere. But that's changed recently, with depositors deciding to pull their money from traditional banks and placing it in higher yielding securities like money markets, T-bills and the like. Ultimately, banks will likely decide to raise the interest rate they pay depositors, but that means lower profits and lower loan supply. Even before this recent exodus of deposits, loan officers have been tightening their lending standards. In our view, such tightening is likely to become even more prevalent, and that poses another headwind for money supply and consequently economic and earnings growth. In other words, it's now harder to hold the view that growth will continue to hold up in the face of the fastest Fed tightening cycle in modern times. Secondarily, the margin deterioration across most industries we've been discussing for months was already getting worse. Any top line shortfall relative to expectations from tighter money supply will only exacerbate this negative operating leverage dynamic. The bottom line is that Fed policy works with long and variable lags. Many of the key variables used by the Fed and investors to judge whether Fed policy changes are having their desired effect are backward looking- things like employment and inflation metrics. Forward looking survey data, like consumer and corporate confidence, are often better at telling us what to expect rather than what's currently happening. On that score the picture is pessimistic about where growth is likely headed, especially for earnings. Rather than a random or idiosyncratic shock, we view last week's events as just one more supporting factor for our negative earnings growth outlook. In short, Fed policy is starting to bite and it's unlikely to reverse, even if the Fed were to pause its rate hikes or quantitative tightening. Instead, we think the die is likely cast for further earnings disappointments relative to consensus and company expectations, which means lower equity prices before this bear market is over. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

As the advancement of generative AI takes off, how might this inflection point in technology impact markets, companies, and investors alike? Equity Analyst and Head of U.S. Internet Research Brian Nowak and Head of the U.S. Software Research Team Keith Weiss discuss.----- Transcript -----Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Equity Analyst and Head of U.S. Internet Research for Morgan Stanley. Keith Weiss: And I'm Keith Weiss, Head of the U.S. Software Research Team. Brian Nowak: Today, we're at Morgan Stanley's annual Tech, Media, and Telecom conference in downtown San Francisco. We've been here most of the week talking with industry leaders and emerging companies across the spectrum, and the topic on everyone's mind is clearly A.I. So today, we're going to share some of what we're hearing and our views on the rise of artificial intelligence tools. It's Thursday, March 9th at 2 p.m. here on the West Coast. Brian Nowak: All week, Keith and I have been meeting with companies and speaking with new companies that are developing technologies in artificial intelligence. We've written research about how we think that artificial intelligence is reaching somewhat of an iPhone inflection moment with new people using new tools, and businesses starting to realize artificial intelligence is here to stay and can drive real change. Keith, talk to us about how we reached this moment of inflection and how do you think about some of the big picture changes across technology? Keith Weiss: Well, thank you for having me, Brian. So we've been talking about artificial intelligence for some time now. Software companies have been infusing their solutions with machine learning driven type algorithms that optimize outcomes for quite some time. But I do think the iPhone analogy is apt, for two reasons. One, what we're talking about today with generative AI is more foundational technologies. You can almost think about that as the operating system on the mobile phone like the iOS operating system. And what we've heard all week long is companies are really seeing opportunity to create new apps on top of that operating system, new use cases for this generative AI. The other reason why this is such an apt analogy is, like the iPhone, this is really capturing the imagination of not just technology executives, not just investors like you and I, but everyday people. This is something that our kids are coming home from high school and saying, "Hey, dad, look at what I'm able to do or with chatGPT, isn't this incredible?" So you have that marketing moment of everybody realizes that this new capability, this new powerful technology is really available to everybody. Keith Weiss: So, Brian, what do you think are going to be the impacts of this technology on the consumer internet companies that you cover? Brian Nowak: We expect significant change. There is approximately $6 trillion of U.S. consumer expenditure that we think is going to be addressed by change. We see changes across search. We see more personalized search, more complete search. We see increasing uses of chatbots that can drive more accurate, personalized and complete answers in a faster manner across all types of categories. Think about improved e-commerce search helping you find products you would like to buy faster. Think about travel itinerary AI chatbots that create entire travel itineraries for your family. We see the capability for social media to change, better rank ordering and algorithms that determine what paid and organic content to show people at each moment. We see new creator tools, generative AI is going to enable people to make not only static images but more video based images across the entire economy. So people will be able to express themselves in more ways across social media, which will drive more engagement and ultimately more monetization for those social media platforms. We see e-commerce companies being able to better match inventory to people. Long tail inventory that previously perhaps could not find the right person or the right potential buyer will now better be able to be matched to buyers and to wallets. We see the shared economy across rideshare and food delivery also benefiting from this. Again, you're going to have more information to better match drivers to potential riders, restaurants to potential eaters. And down the line we go where we ultimately see artificial intelligence leading to an acceleration in digitization of consumers time, digitization of consumers wallets and all of that was going to bring more dollars online to the consumer internet companies. Brian Nowak: Now that's the consumer side, how do you think about artificial intelligence impacting enterprise in the B2B side? Keith Weiss: Yeah, I think there's a lot of commonalities into what you went through. On one level you talked about search, and what these generative AI technologies are able to do is put the questi

While the U.S. has surprised investors with its economic resilience, new labor market and retail sales data could challenge this continued strength.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Thursday, March 9th at 2 p.m. in London. One of the biggest surprises this year has been the resilience of the U.S. economy. This story faces a key test over the next week, with a large bearing on how investors may think about where we are in the cycle. Investors entered this year downbeat on U.S. growth, with widespread expectations of a recession. A payback in high levels of consumption over the pandemic, and the lagged impact of higher interest rates, were both big drivers of this view. And indeed many traditionally leading indicators of economic activity did, and still do, point to elevated economic risk. Yet the story so far has been different. The U.S. economy is still seeing robust consumption and jobs growth and more economically sensitive stocks have been major outperformers. Last month the U.S. economy added half a million jobs and saw very robust retail sales, data points that were taken by the market as a sign that the economy may not be slowing at all. That might be the case, but what's interesting is that this story is about to get a key update. Over the next week, we'll get the next release of data on the U.S. labor market and retail sales. And that data comes with a big uncertainty. The uncertainty is how much of the strength in January's data was flattered by so-called seasonal adjustments. For obvious reasons, a lot of things are sold in December and a lot of people are hired to sell them. In January, activity and jobs usually drop off, and so seasonal adjustments are important to help look through all this noise. To be more specific, retail sales usually drop 20% between December and January. This time around, they only dropped 16%, and since they dropped less than normal this was reported as a healthy gain. The U.S. usually loses 3 million jobs in January as seasonal workers are let go. This time the U.S. lost two and a half million jobs. December holidays are real and we should adjust for them. But if consumption patterns have changed since 2020, historical seasonal adjustments could be misleading. This month's data may give us a much cleaner picture of where that activity really is. If activity is once again strong, it could help further fuel the idea that U.S. growth this year will be better than feared. But if it's weak, investors may start to think that January's strength was something of a statistical quirk, especially in the face of other forward indicators that look much softer. Because of this, we think weak data over the next couple of days could be especially good for bonds. But either way, this data has a major bearing on the market narrative. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

While there is some skepticism that Asia’s growth will outperform this year, there are a few promising indicators that investors may want to keep in mind.----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing how Asia's growth is bouncing back. It's Wednesday, March 8th at 9 a.m. in Hong Kong. The last time I came on this podcast, I spoke about why we expect Asia's growth to outperform in 2023. To briefly recap, we expect Asia's growth to be five percentage points higher than the developed markets by the end of the year. One of the key debates we have with investors is precisely about how the growth outlook is tracking relative to our bullish forecasts. Investors are generally skeptical on two counts. First, for China, investors believe that consumption growth will not be sustained after the initial reopening boost. Second, for region excluding China, investors saw that there was a soft patch in the consumption data for some of the economies, and so they are questioning if this will persist over time and across geographies. For China, we have already seen a sharp rebound in services spending in areas like dining out, domestic travel and hotels. We expect consumption growth to continue to recover towards the pre-COVID strength in a broad-based manner. Crucially, this consumption growth is being supported by the sustainable drivers of job growth and income growth rather than a drawdown in excess savings. Private sector confidence is being revived by the alignment of policies towards a pro-growth stance. This shift in stance also means that policymakers will likely be taking quick and concerted policy action to address any remaining or fresh impediments to growth. In other words, this policy stance is likely to persist at least until we get clear signs of a sustainable recovery. Moreover, the property sector, which some investors fear might be a drag on household sentiment, appears to be recovering faster than our expectations. For region excluding China, we focus on the next largest economies in purchasing power parity terms, which is India and Japan. For India, growth indicators did slow post the festive season in October, but have reaccelerated in early 2023. Cyclically strong trailing demand has only lifted capacity utilization, and structurally government policies are still very much geared towards reviving private investment. We see private CapEx cycle unfolding, which will sustain gains in employment and allow consumption growth to stay strong in the coming quarters. For Japan, we see three reasons why growth should improve in 2023. Monetary policy will remain accommodative, private CapEx is now on the mend and Japan will benefit from the full reopening of China this spring, in form of increased tourism and goods exports. Overall, we think we are still on track for our base case narrative of growth acceleration and outperformance. In fact, we see marginal upside risk to our above consensus growth forecasts, which will be driven predominantly by China and its spillover impact to the rest of the region. For China, the upside to growth forecasts stems from the possibility that pro-growth pragmatism may set in motion a much stronger recovery than currently expected. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

Original Release on February 24th, 2023: As short-term bond yields continue to rise, what impact does this comparatively high yield have on the broader market?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 24th at 2 p.m. in London. One of the biggest stories brewing in the background of markets is the sharp rise in yields on safe, short-term bonds. A 6 month Treasury bill is a great example. In November of 2021, it yielded just 0.06%. Today, just 14 months later, it yields 5.1%, its highest yield since July of 2007. The rise in safe short-term yields is notable for its speed and severity, as the last 12 months have seen the fastest rise of these yields in over 40 years. But it also has broader investment implications. Higher yields on cash like instruments impact markets in three distinct ways, all of which reduce the incentive for investors to take market exposure. First and most simply, higher short term rates raise the bar for what a traditional investor needs to earn. If one can now get 5% yields holding short term government bonds over the next 12 months, how much more does the stock market, which is significantly more volatile, need to deliver in order to be relatively more appealing? Second, higher yields impact the carry for so-called leveraged investors. There is a significant amount of market activity that's done by investors who buy securities with borrowed money, the rate of which is often driven by short term yields. When short term yields are low, as they've been for much of the last 12 years, this borrowing to buy strategy is attractive. But with U.S. yields now elevated, this type of buyer is less incentivized to hold either U.S. stocks or bonds. Third, higher short term yields drive up the cost of buying assets in another market and hedging them back to your home currency. If you're an investor in, say, Japan, who wants to buy an asset in the U.S. but also wants to remove the risk of a large change in the exchange rate over the next year, the costs of removing that risk will be roughly the difference between 1 year yields in the US and 1 year yields in Japan. As 1 year yields in the U.S. have soared, the cost of this hedging has become a lot more expensive for these global investors, potentially reducing overseas demand for U.S. assets and driving this demand somewhere else. We think a market like Europe may be a relative beneficiary as hedging costs for U.S. assets rise. The fact that U.S. investors are being paid so well to hold cash-like exposure reduces the attractiveness of U.S. stocks and bonds. But this challenge isn't equal globally. Both inflation and the yield on short-term cash are much lower in Asia, which is one of several reasons why we think equities in Asia will outperform other global markets going forward. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you. 

While equity markets continue to rally, the key to the end of the bear market may be in the fundamentals.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 6th at 2 p.m. in New York. So let's get after it. Given our focus on the technicals in the short term, I'm going to provide an update on that view today, which contrasts with our intermediate term view that the bear market is not over. In short, equity markets traded right to technical support levels on Thursday last week and held. More importantly, they reacted strongly from those levels, which suggests this will not be a one day wonder, meaning the bear market rally may not be over yet. While my comments will focus on the S&P 500, these observations apply to most of the other major indices as well: the Nasdaq, Russell 2000 and the Dow Industrials, which remains the weakest of the bunch. First, as already mentioned, the key support levels were tested twice over the past few weeks, but on Thursday equity prices reacted strongly around the second test. As a strategist, I respect the price action and need to incorporate it into our fundamental view, which remains bearish. In addition to the strong rebound, the S&P 500 was able to recapture its uptrend from the rally that began in October. However, we did not observe any positive divergence on the second retest, and that leaves the door open that this rally may still be on borrowed time. We would point out that one of the reasons we called the rally in October had to do with the fact that we did get a very strong positive divergence on that secondary low in mid-October. For listeners who don't use technical analysis, a positive divergence is when markets make new price lows on less momentum. We measure momentum through price oscillators like relative strength or moving average convergence divergence. The other thing we're watching closely from a tactical standpoint is the longer term uptrend that began after the financial crisis in 2009. We continue to think it is critical that the S&P 500 get back above it to confirm the cyclical bear market is over. This trend line has provided critical resistance and support over the past 14 years during the secular bull market. More recently, it has been more of a resistance line and that level comes in today at around 4150 on the S&P 500. While we think the S&P 500 could make another attempt at this key resistance, it will require two things to surmount it- lower 10 year U.S. Treasury yields and a weaker dollar. In fact, we think Friday's sharp fall in 10 year yields was an important driver of the bounce in stocks. The dollar, too, showed some signs of exhaustion and it would be helpful if it can decline more meaningfully. As we suggested last week, in the absence of a weaker dollar and lower yields, this bear market rally will likely fail once again. The bottom line, there is plenty of bullish and bearish fodder in the technicals in our view, and one will need to take a view on the fundamentals to decide this bear market for stocks is over. Our view remains the same, the bear market is not over, but we acknowledge that Friday's price action may push out the next leg lower for a few more weeks. As we've been discussing on prior podcasts, the main reason we believe the bear market is not over is because the earnings recession has much further to go. Rather than repeating our case once again, we would like to highlight an important note published last week by Todd Castagno, our Global Valuation, Accounting and Tax team, appropriately entitled Exhausted Earnings. In this note, the team discusses their analysis of accruals and to what extent net income is diverging from cash flows. In short, the gap between reported earnings and cash flow is the widest in 25 years. This analysis supports our negative operating leverage thesis and means earnings estimates have a long way to fall over the next several quarters. Unfortunately, most stock valuations do not reflect this risk and why we think the risk reward for U.S. equities remains poor despite the positive price action last week. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

The way companies and individuals spend their money has changed in the wake of the COVID pandemic. How might market leadership shift as a result and will new market winners come into focus? Chief Cross-Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: And on part two of this special episode, we'll be continuing our discussion of the "Next American Productivity Renaissance". It's Friday, March 3rd at 2 p.m. in London. Lisa Shalett: And it's 9 a.m. in New York. Andrew Sheets: So Lisa, let's take this to markets, how do you think this impacts equity market leadership, given that we've been in a market that's really been defined by the age of secular stagnation. What do you think happens now and who will be those new leaders? Lisa Shalett: This is one of the most important, I think, outcomes of our thesis. And that is that pendulums swing and market leadership shifts all the time, but when it's at that moment of inflection there's huge amounts of pushback, typically. Our sense is that the wealth creation ahead of us may not be in the current leadership in consumer tech, but rather in enterprise tech and the technology providers who are the leaders in new automation technologies that are going to allow us potentially to automate parts of our economy that have heretofore resisted. So it's a lot of the services side of the economy. Think of financial services, consumer services, government services, education services, how manual some of those industries are. And yet when we think about these triads or four or five level combinations of things like artificial intelligence, and machine learning, and optical scanning, and natural language processing and voice recognition. These are things that could really transform service-oriented businesses in terms of their margins and the economics of them. And so we envision a leadership that is potentially bimodal, that includes the tech enterprise enablers. Some of the software or software-as-a-service, some of the technology consultants who will help implement these automation programs and some of the beneficiaries, the tech takers, right. Think about some of those banks, those insurance companies, those healthcare companies, educational-oriented institutions that are just so heavy in manual service support infrastructures that could be rationalized. Andrew Sheets: So I'd like to dive into two of those threads and in just a little bit more detail. Just in terms of, kind of, the decade we've just been in. And, you know, I think it was pretty unique that it was a decade with some of the lowest cost of capital we've ever seen in economic history, and yet, you know, it's kind of left us with an economy where it's very easy to order food and very hard to take a train to the airport. We've had a lot of investment in consumer-led technology and a lot less in infrastructure. Do you think that equation has finally changed in a bigger way? And what do you think that means for maybe winners and losers of the changes that might be happening? Lisa Shalett: Our perspective is that I don't know that it's a permanent change. I think pendulums swing and there are waves when technology is more consumer-oriented. The issue with consumer technology, as we know and certainly with the smartphone, has been there's 2 billion people implementing that technology in 2 billion different ways. So it's very hard to scale those productivity benefits, if there are any, across an economy. When you go through periods of enterprise or economy-wide or infrastructure deepening-based technology spends, that's when economies can transform. And so I think it's a phase in the market. But I think one that is really important, you know, when we think about the advancement of overall return on assets in the economy. Andrew Sheets: And so, Lisa, digging into that technology piece, is there an example that stands out to you of a type of technology consumption that you think could be more fleeting as a result of the post-COVID period? And to your point about the more tangible, long lasting shifts in technology investment, the types of things that will be a lot more permanent and could really surprise people in their permanence over the longer run? Lisa Shalett: I'm not a technology visionary, but I do think that so many of the consumer technologies that we see over time end up being cannibalizing and substitutive as opposed to truly revolutionary. So, think about the consumption of media. We're still consuming media, it's just on what mode. Are we consuming it through a radio broadcast, a television broadcast, now streaming services on demand and etc, but it's conte

The COVID pandemic changed the way the U.S. engages with work, but how will these shifts impact structural changes to capital investment? Chief Cross-Asset Strategist Andrew Sheets and Chief Investment Officer for Wealth Management Lisa Shalett discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: And on this special two-part episode, we'll be discussing what we see as the "Next American Productivity Renaissance". It's Thursday, March 2nd at 2 p.m. in London. Lisa Shalett: And it's 9 a.m. in New York. Andrew Sheets: So while everybody has been paying close attention, and rightly so, to 40 year highs of inflation that we've been having recently, there's another legacy from this pandemic that we want to dig into more deeply. We believe that the COVID crisis catalyzed an incredibly powerful regime shift, a once-in-a-generation shock to the labor markets which transformed the nature of work and is accelerating structural changes to capital investment. Lisa, you believe we're on the cusp of what you call the "Next American Productivity Renaissance", and this renaissance is underpinned by an upcoming capital spending supercycle. So, I guess the place to start is what does that mean and what's driving it? Lisa Shalett: I mean, I think that some of these trends were already beginning to take form before COVID struck, but COVID was really an accelerant. And so if we think about first the detachment from the labor force and the way COVID really transformed the way we think about work, and those jobs that maybe were not flexible to convert to a remote setting, or a work from home setting, and carried with them in-person high risk attributes. I think that was really one of the first dimensions of it, but then it was really about companies having to fundamentally rethink and re-engineer business models towards digitization, right? The removal of human contact. And then you overlay those two major pillars with things like decarbonization and the issues that emerged around how we make this transition to a cleaner energy mix around the world. Obviously COVID accelerated some of the issues around supply chain and deglobalization and how do we secure supply chains. And last but not least, I think it has really become clear we're talking about a world where incentives to invest either to substitute for labor, to strengthen our infrastructure, to commit to some of these climate change initiatives, to re-engineer supply chains or to deal with this new multipolar world. The incentives and the argument for capital spending has really changed. Andrew Sheets: So Lisa actually it's that last point on labor market tightness that I'd like to dive into a little bit more. Because I mean, it's fair to say that this would actually be a pretty normal cyclical phenomenon that as labor markets get tighter, as workers are harder to find, that companies decide that now it's worth investing more to make their existing workers more productive. Do you think that's a fair characterization of some past capital spending cycles that we've seen? And how do you think this one could fit into that pattern? Lisa Shalett [00:04:19] Yes, I think very often, you know, we've gone through these periods where the capital for labor substitution has been at the forefront. Now, one of the things that very often we have to wait for are what I call the supply side enablers of that. There have been eras where there's more automation-oriented technology that is available, and then there's eras where perhaps there's been less. And I think that one of the things that we're positing is that after the golden age of private equity that we're entering one of those periods of technology J-curve explosion, right, where the availability of automation-orienting technologies is there. So it enables part of the dialog around capital for labor arithmetic. Andrew Sheets: I also want to ask you about decarbonization as a theme, which you cited as one of these drivers of the productivity renaissance and capital deepening because I think you do encounter a view out there in the world that decarbonization and environmental regulation is negative for productivity. What do you think the market might be missing about decarbonization as a theme? And how does it drive higher productivity in the future rather than lower productivity? Lisa Shalett: I think fundamentally that there is no doubt that as we make this transition, there are going to be bumps and bruises along the road. And part of the issue is that as we move away from what is perhaps the lowest cost, but most dirty technologies that there may be pressures on inflation. But the flip side of that is that it creates huge incentives to drive productivity improvement in some of

After the passing of the Inflation Reduction Act in the U.S., other countries may be looking to invest more in their own energy transitions.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, March 1st at 10 a.m. in New York. When Congress passed and the president signed into law the Inflation Reduction Act last year, they may have started a race among global governments to spend new money in an attempt to cut carbon output dramatically. Consider the European Union, where our economists and strategists are flagging that they expect, later this month, there will be an announcement of a major allocation of government funds to mirror the nearly $370 billion allocated by the U.S. toward its own energy transition. In the U.S., we've already flagged that much of the investment opportunity lies in the domestic clean tech space. As Stephen Byrd, our Global Head of Sustainability Research, has flagged the IRA's monetary allocation and rules creating preferences for materials sourced domestically or in friendly national confines, means that the U.S. clean tech space is seeing a substantial growth in demand for its products and services. In the EU, the story is more nuanced as we await details on what a final version of the European Commission's Green Deal Industrial Plan is, a process that could take us into the summer or beyond. Streamlining regulations to encourage private funding and expand the network for trade partners on green tech equipment is expected to be in focus. So the near term macro impacts are murky, but at a sector level, such a policy should present opportunities in utilities, capital goods, materials and construction. In short, this policy would mean the EU is finding ways to accelerate demand for these green enabler companies. So, in line with the transition to decarbonization as one of our big three investment themes for 2023, investors would do well to follow the money and see where there may be opportunities. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As the U.S. economy remains resilient in the face of continued rate hikes, investors may wonder if the Fed will re-accelerate their policy tightening or if cuts are on their way.----- Transcript -----Welcome to Thoughts on the Market. I'm Sarah Wolfe from the U.S. Economics Team. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the economic response to the Fed's monetary tightening. It's Tuesday, February 28th, at 1 p.m. in New York. The Fed has been tightening monetary policy at the fastest rate in recent history. And yet the U.S. economy has been so remarkably resilient thus far that investors have begun to interpret this resilience as a sign that the economy has been less affected by monetary policy than initially expected. And so recession fears seem to have turned into fears of re acceleration. Of course, interest sensitive parts of the economy have largely reacted as expected to the Fed hiking interest rates. Housing activity responded immediately to higher interest rates, declining significantly more than in prior cycles and what our models would imply. Consumer spending on durable goods has dampened as well, which is also expected. And yet other factors have bolstered the economy, even in the face of higher rates. The labor market has shown more resilience since the start of the hiking cycle as companies caught up on significant staffing shortfalls. Households have spent out excess savings supporting spending, and consumers saw their spending power boosted by declining energy prices just as monetary tightening began. As these pillars of resilience fade over the coming months, an economic slowdown should become more apparent. Staffing levels are closing in on levels more consistent with the level of economic output, pointing to a weaker backdrop for job growth for the remainder of 2023 and 2024. Excess savings now look roughly normal for large parts of the population, and energy prices are unlikely to be a major boost for household spending in coming months. Residential investment and consumption growth should bottom in mid 2023, while business investment deteriorates throughout our forecast horizon. We expect growth will remain below potential until the end of 2024 as rates move back towards neutral. But even with more deceleration ahead, greater resilience so far is shifting out the policy path. We continue to expect the Fed to deliver a 25 basis point hike about its March and May meetings, bringing peak policy rates to 5 to 5.25%. However, with a less significant and delayed slowdown in the labor market, with a more moderate increase in the unemployment rate, the Fed's pace of monetary easing is likely to be slower, and the first rate cut is likely to occur later. We think the Fed will hold rates at these levels for a longer period rather than hike to a higher peak, as this carries less of a risk of over tightening. We now see the Fed delivering the first rate cut in March 2024 versus our previous estimate of December 2023, and cutting rates at a slower pace of 25 basis points each quarter next year. This brings the federal funds rate to 4.25% by the end of 2024. With rates well above neutral throughout the forecast horizon, growth remains below potential as well. As for the U.S. consumer, while excess savings boosted spending in 2022 despite rising interest rates, we expect consumers to return to saving more this year, which means a step down in spending. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

As we enter the final month of the first quarter, recalling the history of bear market trends could help predict whether earnings will fall again.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, February 27th at 11am in New York. So let's get after it. Our equity strategy framework incorporates several key components. Overall earnings tend to determine price action the most. For example, if a company beats the current forecast on earnings and shows accelerating growth, the stock tends to go up, assuming it isn't egregiously priced. This dynamic is what drives most bull markets, earnings estimates are steadily rising with no end in sight to that trend. During bear markets, however, that is not the case. Instead, earnings forecasts are typically falling. Needless to say, falling earnings forecasts are a rarity for such a high quality diversified index like the S&P 500, and that's why bear markets are much more infrequent than bull markets. However, once they start, it's very hard to argue the bear markets over until those earnings forecasts stop falling. Stocks have bottomed both before, after and coincidentally with those troughs in earnings estimates. If this bear market turns out to have ended in October of last year, it will be the farthest in advance that stocks have discounted the trough in forward 12 month earnings. More importantly, this assumes earnings estimates have indeed troughed, which is unlikely in our view. In fact, our top down earnings models suggest that estimates aren't likely to trough until September, which would put the trough in stocks still in front of us. Finally, we would note that the Fed's reaction function is very different today given the inflationary backdrop. In fact, during every material earnings recession over the past 30 years, the Fed was already easing policy before we reached the trough in EPS forecasts. They are still tightening today. During such periods, there is usually a vigorous debate as to when the earnings estimates will trough. This uncertainty creates the very choppy price action we witness during bear markets, which can include very sharp rallies like the one we've experienced over the past year. Furthermore, earnings forecasts have started to flatten out, but we would caution that this is what typically happens during bear markets. The stock's fall in the last month of the calendar quarter as they discount upcoming results and then rally when the forward estimates actually come down. Over the past year, this pattern has been observed with stocks selling off the month leading up to the earnings season and then rallying on the relief that the worst may be behind us. We think that dynamic is at work again this quarter, with the stocks selling off in December in anticipation of bad news and then rallying on the relief it's the last cut. Given that we are about to enter the last calendar month of the first quarter later this week, we think the risk of stocks falling further is high. Bottom line, we don't believe the earnings forecasts are done and we think they're going to fall again in the next few months. This is a key debate in the market, and our take is that while the economic data appears to have stabilized and even turned up again in certain areas, our negative operating leverage cycle is alive and well and could overwhelm any economic scenario over the next six months. We remain defensive going into March with the worst of this earnings cycle still ahead of us. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

As short-term bond yields continue to rise, what impact does this comparatively high yield have on the broader market?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 24th at 2 p.m. in London. One of the biggest stories brewing in the background of markets is the sharp rise in yields on safe, short-term bonds. A 6 month Treasury bill is a great example. In November of 2021, it yielded just 0.06%. Today, just 14 months later, it yields 5.1%, its highest yield since July of 2007. The rise in safe short-term yields is notable for its speed and severity, as the last 12 months have seen the fastest rise of these yields in over 40 years. But it also has broader investment implications. Higher yields on cash like instruments impact markets in three distinct ways, all of which reduce the incentive for investors to take market exposure. First and most simply, higher short term rates raise the bar for what a traditional investor needs to earn. If one can now get 5% yields holding short term government bonds over the next 12 months, how much more does the stock market, which is significantly more volatile, need to deliver in order to be relatively more appealing? Second, higher yields impact the carry for so-called leveraged investors. There is a significant amount of market activity that's done by investors who buy securities with borrowed money, the rate of which is often driven by short term yields. When short term yields are low, as they've been for much of the last 12 years, this borrowing to buy strategy is attractive. But with U.S. yields now elevated, this type of buyer is less incentivized to hold either U.S. stocks or bonds. Third, higher short term yields drive up the cost of buying assets in another market and hedging them back to your home currency. If you're an investor in, say, Japan, who wants to buy an asset in the U.S. but also wants to remove the risk of a large change in the exchange rate over the next year, the costs of removing that risk will be roughly the difference between 1 year yields in the US and 1 year yields in Japan. As 1 year yields in the U.S. have soared, the cost of this hedging has become a lot more expensive for these global investors, potentially reducing overseas demand for U.S. assets and driving this demand somewhere else. We think a market like Europe may be a relative beneficiary as hedging costs for U.S. assets rise. The fact that U.S. investors are being paid so well to hold cash-like exposure reduces the attractiveness of U.S. stocks and bonds. But this challenge isn't equal globally. Both inflation and the yield on short-term cash are much lower in Asia, which is one of several reasons why we think equities in Asia will outperform other global markets going forward. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

Companies continue their attempts to mitigate their environmental impact. But are some merely buying their way out of the problem using carbon offsets? Global Head of Sustainability Research Stephen Byrd and Head of ESG Fixed-Income Research Carolyn Campbell discuss. ----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research. Stephen Byrd: On this special episode of the podcast, we'll discuss the voluntary carbon offset market and the role carbon offsets play in achieving companies' decarbonization goals. It's Thursday, February 23rd at 10 a.m. in New York. Stephen Byrd: As extreme weather becomes the new normal, and sustainability rises in importance on investors' agendas, many companies are working towards mitigating their environmental impact. But even so, there's persistent public concern that some companies claiming to be carbon neutral may in fact be "greenwashing" by purchasing so-called carbon offsets. So, Carolyn, let's start with the basics. What exactly are carbon offsets and why should investors care? Carolyn Campbell: So a carbon offset represents one ton of carbon dioxide equivalent removed, reduced or avoided in the atmosphere. Companies are buying offsets to neutralize their own emissions. They essentially subtract the amount of carbon offsets purchased from their total emissions, from their operations and supply chain. These offsets are useful because it allows a company to take action against their emissions now, while implementing longer term decarbonization strategies. However, there's concern that these companies are just buying their way out of the problem and are using these offsets that do not actually do anything with respect to actually limiting global warming. So, Stephen, some of these offsets focus on reducing carbon dioxide emissions, while others aim to directly remove these emissions from the atmosphere. Between these so-called avoidance and removal offsets, how do you see the market evolving for each over the next 5 to 10 years, let's say? Stephen Byrd: Yeah, Carolyn, I think the balance is set to shift in favor of removal over the coming decade. So we developed an assessment of the potential mix shift from carbon avoidance to carbon removal projects, which shows the long term importance of removal projects as well as the near-term to medium term need for avoidance projects. We're bullish that over the long term removal projects, and think of these projects as projects that demonstrably and permanently take carbon dioxide out of the atmosphere, as generating enough carbon offset credits to reach company's net zero targets, again in the long term. However, over the near to medium term, call it the next 5 to 10 years, we expect the volume of removal projects to fall short. As a result, we think carbon avoidance projects, and these would be projects that avoid new atmospheric emissions of carbon dioxide. These will play an important role as offset purchasers shift their mix of carbon offsets towards removal over the course of this decade. Carolyn, one of the big debates in the market around voluntary carbon offsets involves nature based projects versus technology based projects. Could you give us some examples of each and just talk through, is one type significantly better than the other? And which one do you think will likely gain the most traction? Carolyn Campbell: Sure. So on the one side, we've got these nature based projects which include things like reforestation, afforestation and avoided deforestation projects. In essence planting trees and protecting forests that are already there. There's also other projects related to grasslands and coastal conservation. On the other side, we've got these tech based projects which are actually quite wide ranging. This includes things like deploying new renewable technology or capping oil wells to prevent methane leakage, substituting wood burning stove for clean cookstoves, everything up to direct air capture and carbon capture, so on and so forth. So in our view, these tech based offsets will eventually dominate the market, but they face some scaling and cost hurdles over in the near term. Tech based offsets have some key advantages. They're highly measurable and they have a high probability of permanence, both disadvantages on the nature based side. Nature based sides, like I said, have measurement hurdles, but we think they represent an important interim solution until either geographic limits are reached because there's no more area left to reforest, or legislative conservation takes over. Removal technologies, like direct air capture and carbon capture, yield highly quantifiable results. And that drives a value in a market where the lack of confidence is a major obstacle to growth. So we think that's where the mark

With housing affordability plateauing and inventory picking up, sales could be poised to rise again in the near future.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securities Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing and mortgage markets. It's Wednesday, February 22nd, at 11 a.m. in New York. Jay Bacow: All right. So, Jim, when we're looking at data on the housing market, it seems like it's all over the place. We've got home sale activity pointing one direction. We've got home prices doing other things. What's going on? You've had this bifurcation narrative. Is the bifurcation narrative still bifurcating? Jim Egan: So to remind our listeners, the bifurcation narrative for our housing forecasts is between home prices, which we thought were a lot more protected, and housing activity, so sales and housing starts where we thought you were going to see a lot more weakness. And I would say that bifurcation narrative still exists. But, as you're saying, the different data have been pointing to different things. For instance, purchase applications, they picked up sequentially in January from December. And after declining in every single month of 2022, the homebuilder confidence has increased in both January and February. Jay Bacow: All right. But when I think about what happened over that time period, mortgage rates fell almost 100 basis points from their highs in November, as you measure that purchase application pick up from December to January. Is that playing a role? Do you think that there are signs that maybe housing activity is going to pick back up? Jim Egan: So from a mortgage rate perspective, it'd be difficult for us to say it isn't. So we do think that that's playing a role, but we also think it's a little too early to say that housing activity is going to pick back up from here. For one thing, mortgage rates might have come down 100 basis points from mid-November into January, but they've also begun to move higher over the past few weeks. For another, the variables that we've been paying close attention to haven't really shown much improvement. Jay Bacow: Those variables, you mean affordability and supply. How are those looking now? Jim Egan: Exactly. Now let's think about what drove our bifurcation hypothesis in the first place. Because of the record growth in home prices that we saw in 2021 and 2022, combined with the sharp increase in mortgage rates in 2022. They were up almost 400 basis points before that 100 basis point decline that we talked about. Affordability deteriorated more than at any point in over three decades. In fact, the year over year deterioration was roughly three times what we experienced in the years leading up to the GFC. Jay Bacow: Now we want to remind our listeners that this affordability deterioration is really for first time homebuyers. Given the vast predominance of the fixed rate mortgage in the United States most homeowners have a low 30 year fixed rate mortgage with an average rate of about 3.5%. Obviously, their affordability didn't change. What did change was prospective homeowners that are looking to buy a house and now would have to take a mortgage at a higher rate. That does mean that those people with a low fixed rate mortgage, they've got low rates. Jim Egan: And that means that they simply have not been incentivized to list their homes for sale. The inventory of existing homes available for sale plummeted to over 40 year lows. And we only really have 40 years of data. More importantly for the drop in sales volumes that we've seen, if an existing homeowner is not selling their home, they're also not buying a home on the follow that further exaggerates the drop. But thinking about where we are today, affordability is no longer rapidly deteriorating. In fact, it's basically been unchanged over the past three months. And inventories, they remain near 40 year lows, but they're also no longer falling rapidly. If anything, they're actually kind of increasing on the margins. It is only on the margins because of that lock in effect that you mentioned Jay. Jay Bacow: Okay. But it is increasing slightly. So if you have a little bit of a pickup in inventory in basically unchanged affordability, what does that mean for home sales? Jim Egan: Affordability is challenged and supply is very tight, but both are no longer getting even more stretched. In other words, we don't see a catalyst for sales volumes to inflect higher from here, but we also don't think the ingredients are in place for large month over month declines to continue either. I wouldn't say that sales have bottomed, but I would lean more towards they are in the process of bottoming right now. We expect volumes to be weak in the first hal

While the causes of the European equity rally have become more clear over time, so have the caveats that warrant caution over optimism for cyclical stocks.----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the deflating safety cushion for European equities. It's Tuesday, February the 21st at 3 p.m. in London. With the benefit of hindsight, it's relatively easy to justify the European equity rally since the start of October, given that we've seen an improvement in the macro news flow against a backdrop of low valuation and depressed investor sentiment and positioning. While the macro outlook could continue to improve from here, we think the safety cushion that low valuation and depressed sentiment had previously provided has deflated considerably as investors have been drawn back into the market by rising price momentum. On valuation, the MSCI Europe Index still looks quite inexpensive on a next 12 month forward PE of 13, however the same ratio for Europe's median stock has risen to 16, which is at the upper end of its historic range. Admittedly, a less padded safety cushion is not necessarily a problem if the fundamental economic and earnings trends continue to improve. However, there is now considerably less margin for any disappointment going forward. This rebound in European equities has been led primarily by cyclical sectors who have outperformed their defensive peers by nearly 20% over the last six months. Historically, this pace of outperformance has tended to be a good sign, suggesting that we had started a new economic cycle with further upside for cyclical stocks ahead. However, while this sounds encouraging, we see three caveats that warrant caution rather than optimism at this point. First, we have seen no deterioration in cyclicals’ profitability yet, and the lack of any downturn now makes it harder to envisage an EPS upturn required to drive share prices higher going forward. Second, we get a very different message from the yield curve, which has consistently proved to be one of the best economic leading indicators over many cycles. Today's inverted yield curve is usually followed by a period of cyclical underperformance and not outperformance. And thirdly, cyclicals. Valuations look elevated, with the group trading in a similar price to book value as defensives. When this has happened previously, it usually signals cyclicals’ underperformance ahead. Given our cautious view on cyclicals, we prefer small and mid-cap stocks as a way to gain exposure to a European recovery. Having underperformed both large caps and cyclicals significantly over the last year, relative valuations for smaller stocks looks much more appealing, and relative performance looks like it is breaking out of its prior downtrend. In addition, we see two specific macro catalysts that should help smaller stocks in 2023, namely falling inflation and a rising euro. Historically, both these trends have tended to favor smaller companies over larger companies, and we expect the same to happen this year. At the country level we think the case for small and mid-cap stocks looks most compelling in Germany, where the relative index, the MDAX, has significantly lagged its larger equivalent, the DAX, such that relative valuations are close to a record low. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts, and share Thoughts on the Market with a friend or colleague today.

As our outlook for global equities becomes more cautious, what is influencing the move and what should investors watch as the story develops?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 17th at 2 p.m. in London. We recently moved to an underweight stance in global equities as part of our cross-asset allocations. I want to talk a bit about why we did this, why we did it recently and what we're watching. The 'why' behind this move is straightforward, global equities now have low risk-adjusted returns in our framework. Our expected return for global stocks is now below what we see for bonds in the U.S., Europe or emerging markets, and it's also lower than what we expect for U.S. dollar cash. With lower expected returns and higher expected volatility, we think it makes sense to hold a lower than normal amount of global equities, hence our underweight stance. In terms of why we've made this change recently, a few things have shifted. Per Morgan Stanley's forecast, we entered the year expecting low returns for U.S. equities, but higher returns for non-U.S. stocks. But as prices have gone up in 2023, our expected returns outside the U.S. have also fallen, while in the U.S. they're now negative. We also think about expected returns based on longer-run valuations, and then adjusting these for economic conditions. We frame those economic expectations through something we call our cycle indicator, which is trying to look at economic data through the lens of being either stronger or weaker than average, and improving or softening. That indicator recently flipped, indicating a regime where the data is still strong but it's no longer improving, and historically that's often meant lower than average equity returns. And all of this has happened at a time when yields have risen, which is improving expected returns for a lot of other assets. The U.S. aggregate bond index now yields about 4.7%, while 12 month U.S. Treasury bills yield about the same amount. That is raising the bar for what global equities need to return to be relatively more attractive within one's portfolio. For a change like this, what are the risks? Well, one would be a stronger economy, which tends to be better for stocks relative to other assets. And some recent data has been strong, especially related to the U.S. labor market and retail sales. Our economists, however, think the growth story is still murky. Recent economic data is being impacted by large seasonal adjustments, which may be accurate, but which could also be flattering January data if economic patterns have changed versus their pre-COVID trends. Meanwhile, other economic indicators from PMIs to the yield curve to commodity prices suggest a softer growth backdrop ahead. Falling expected returns for stocks relative to other assets have led us to downgrade global equities to underweight. A surprising rebound in global growth is a risk to this change, but for now, we see better risk adjusted reward elsewhere in one's portfolio. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

Next month the leadership of the Bank of Japan will change hands, so what policy shifts might be in store and what does this imply for markets?----- Transcript -----Welcome to Thoughts on the Market. I'm Daniel Blake from Morgan Stanley's Asia and Emerging Markets Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss Japanese equity markets and the changing of the guard at the Bank of Japan. It's Thursday, February 16th at 8 a.m. in Singapore. March the 10th will mark the end of an era for Japan, with Haruhiko Kuroda completing his final meeting at the helm of the Bank of Japan. Alongside the late Shinzo Abe, Kuroda-san has been instrumental in creating and implementing the famous Abenomics program over the last decade, and we think he's been successful in bringing Japan out of its long running deflationary stance. And just this week we've had the nomination of his replacement, Kazuo Ueda, a well-respected University of Tokyo professor and former Bank of Japan board member. He may not be a household name outside of the economics community, but his central bank and policy bloodlines run deep, having studied a Ph.D. at MIT alongside former Fed Chairman Ben Bernanke and under the tutelage of Stanley Fischer, former Bank of Israel governor and vice Fed chair. So as we see a generational handover at the BoJ, what do we expect next and what does it imply for equity markets? Firstly, Japan has made a lot of progress, but we don't think the mission has been fully accomplished on the Bank of Japan's 2% inflation target. Current inflation is being driven by cost pressures and while wage growth is picking up, we don't think wages will move up to the levels needed to see inflation at 2% being sustained. So we don't expect the BoJ under Ueda-san to embark on a tightening cycle the way we have seen for the Fed and the ECB. However, we can look for some change and in particular we think Ueda-san will look to resolve some of the market dysfunction associated with the policy of yield curve control. This is where the BoJ looks to cap bond yields at the ten year maturity, around a target of 0%. We expect he'll exit this policy of yield curve control by summer 2023, allowing the curve to steepen. And thirdly, we'll be watching closely his perspective on negative interest rate policy as we weigh up the costs and benefits and the transmission of negative rates into the real economy, albeit at the cost of profitability impacts for the banking sector. His testimony before the DIT on February 24th and his approach to negative interest rates under his governorship will be important to watch. We expect negative interest rate policy to be dropped, but not until 2024 in our base case, but this remains a key debate. So in terms of implications, this is more evolution than revolution for macro policy in Japan. And importantly, we see fiscal policy remaining supportive as the program of new capitalism and Ueda-san looks to strengthen social safety nets and double defense spending from 1% of GDP. Secondly, for equity markets, we see a resilient but still range bound outlook for the benchmark TOPIX Index. Our base case target of 2020 for December 2023 implies it doesn't quite break the top of its three year trading range, but remains well supported. Finally, at a sector level, banks and insurers may benefit from a tilting policy away from yield curve control. Again, especially if followed by a move back to zero rates from negative rate policy. In summary, we'll be watching for any shifts in the BoJ reaction function under the new leadership of Kazuo Ueda, but we do not expect a macro shock to asset markets. Instead, some micro adjustment in the yield curve control policy, and potentially negative interest rates, could help the sustainability of very low interest rates in Japan. Thanks for listening and if you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

As potential candidates begin to announce their presidential campaigns, is it time to start considering how the 2024 race will drive markets?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 15th at 10 a.m. in New York. With the news that Nikki Haley, former South Carolina governor and ambassador to the United Nations, is now running for the Republican nomination for president, investors are starting to ask questions about how the 2024 race for the White House will drive markets. Well, in our view, it's not worth spending too much time on, at least not yet through the lens of an investor, particularly when compared to the very relevant debate about the path of monetary policy and inflation. Let me explain. When it comes to understanding the impact of elections on markets, it's all about the policy paths opened up by different outcomes. Markets would care deeply, for example, if information we had today, say about who's running for president, could reliably tell us something about whether there will be in 2025 changes in tax policy, existing and emerging trade barriers with China or policy toward Ukraine. But at this point, projecting such changes is nearly pure speculation. Consider that, this far ahead of the election, knowing who the declared candidates are doesn't give us a lot of new information about who will become president. Polls, while never a perfect predictor, have little predictive value this far ahead of an election. Look at Barack Obama and Donald Trump who, when they declared their candidacies, didn't have strong poll numbers but obviously found political success. Also, remember that knowing who will become president is only one piece of the puzzle in forecasting policy outcomes. We also need to assess whether the president's party will control Congress or not. If they do, the markets reasonably might want to present higher probabilities of more dramatic policy changes. But again, this far out, there are far too many variables to make this assessment. Consider we know little about potential congressional candidates, their policy positions, and even which policy issues will motivate the election, which is still over a year and a half away. So bottom line, while it's certainly not too early to think about the 2024 election as a voter, as an investor you're better served focusing elsewhere for the time being. We'll clue you in when there's more for investors to work with. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

Though U.S. consumer spending was surprisingly robust in 2022, this poses both new and continuing challenges as households draw down their excess savings.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver from the Morgan Stanley U.S. Equity Strategy Team. Sarah Wolfe: And I'm Sarah Wolfe from the U.S. Economics Team. Michelle Weaver: On this special episode of the podcast, we'll discuss how the U.S. consumer is faring. It's Tuesday, February 14th at 10 a.m. in New York. Michelle Weaver: The health of the consumer is critical for the equity market, and consumer spending last year helped companies continue to grow their earnings. Sarah, can you give us a snapshot of the overall health of the U.S. consumer right now? Do people still have plenty of savings, and what are you expecting around consumer savings for the rest of the year? Sarah Wolfe: The U.S. consumer was extraordinarily strong in 2022, despite negative real disposable income growth. For perspective, spending was about 3% growth year over year in 2022, and real disposable income was negative 6.5%. Part of that was inflation eroding all income gains, but it was also a tough year as we lapped fiscal stimulus from 2021. So what got consumers through negative 6.5% real income growth? It was this excess savings story. Consumers tapped their excess savings pretty significantly, and we estimate that the drawdown was roughly 30% from its peak. However, when we look into 2023, we don't think consumers are going to be tapping into their savings reserves quite as much. Michelle Weaver: It sounds like households draw down quite a bit of their excess saving. Is there any danger that they're going to run out? And if that's the case, when do you think that will play out? Sarah Wolfe: So we don't think 100% of excess savings are going to get spent ever. Remember, savings is not cash in your wallet, it's just anything that hasn't been spent. So some of these savings have moved into longer term investment vehicles as well. We think that an additional 15% will get spent in 2023, and 10% in 2024, after 30% drawdown last year. This slower drawdown in the excess savings will allow the savings rate to recover after sitting at a two decade low in 2022 at roughly 3%. But there are important divergences when you look at the distributional holding of excess savings. For example, the bottom 25% has drawn down over 50% of their excess savings, compared to 30% overall. And we believe they're on track to run their savings dry by 2Q 2023. Michelle Weaver: Great. And then income, of course, is another really important source of spending for consumers. And the January jobs report we got was a big surprise. And the labor market continues to be pretty resilient without any clear signs of stopping. I run a proprietary survey in conjunction with our Alphawise team, and in our most recent wave we found that despite the tech layoffs that have been all over the news, 31% of people are actually less worried about losing their job now versus a year ago. Can you tell me a little bit about what your team expects for the labor market in 2023? Sarah Wolfe: Well, the February jobs report was a whopper by any standard, 517,000 jobs and the unemployment rate hitting all time lows at 3.4%. However, I think it's important to put these numbers into a bit of context. We identified three temporary factors that boosted nonfarm payrolls in January and that we think are unlikely to persist in February. The first is weather. A warmer than usual January added about 130,000 jobs last month. The return of strike workers added 36,000 jobs and seasonal factors added 3 million jobs. Typically, we see the shedding of a lot of workers in January after the holidays, so leisure and hospitality, retail workers, transportation. But because we're dealing with significant labor shortages, and as a result companies are hoarding workers, we're seeing a lot fewer layoffs than we typically would given this time of the year and as a result, the seasonal factors are adding too many jobs right now. We expect the February print to be about 200,000, which is more in line with the trend that we had seen from July until December of 2022. We continue to expect job growth to slow this year, hitting a low of 50,000 jobs a month in mid 2023, pushing the unemployment rate up to about 3.9% by the end of this year. Michelle, you mentioned that you have an alphawise survey. Could you tell us a little bit more about what the survey’s telling you about consumer spending plans? Michelle Weaver: Sure. So on this wave of the survey, we asked people to think about major purchases that they're planning on making over the next three months. And we defined a major purchase like a vehicle, large appliance or vacation. And we found that about a quarter of people are considering shifting to a cheaper alternative, while a third are expecting to delay the purchase al

Inflation was a key topic in a recent meeting at the Brookings Institution. While it has trended downward recently, the details are critical to tracking the path ahead.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Global Chief Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about inflation and the U.S. economy. It's Monday, February 13th at 10 a.m. in New York.This past week, I was fortunate to be part of a panel discussion at the Brookings Institution, a research think tank in Washington, D.C. I was one of three economists in discussion with one of the White House's main economic advisers. Unsurprisingly, the topic of inflation came up.One key chart from the White House economist juxtaposed services wage inflation with core services inflation, excluding housing. The key point of the chart was that falling wage inflation in the services sector may put some downward pressure on inflation in core services, excluding housing. This topic is timely because Chair Powell has repeatedly referenced services inflation, excluding housing, as a key risk to their goal for achieving price stability.A couple of weeks ago I'd written on the same topic, and there we tried to show that even the link itself between wage inflation and services inflation is a bit tenuous. But just looking at the raw data, it is clear that the monthly run rate on other services remains elevated. But a question we have to ask ourselves is, 'is it elevated a lot or a little?'Since June of last year, core services inflation, excluding housing, has trended down, and for December, it was at about 32 basis points on a month-over-month basis. That December pace is 3.9% in annual terms and would contribute about 2.1 percentage points to core PCE inflation. To put those numbers into context, recall that from 2013 to 2019, before COVID, core services inflation, excluding housing, averaged about 18 basis points a month or 2.2% at an annual rate. So yes, services inflation is higher than it has been historically, but it is nowhere near as high, relative to history, as housing inflation has been or core goods inflation has been, until recently. Indeed, from 2013 to 2019, core PCE inflation ran below the Fed's 2% inflation target. If goods inflation and housing inflation just went back to their averages from that period and services inflation, excluding housing, was at the rate that we saw in December, core PCE inflation would have overshot target, but by less than a half a percentage point. And we can't forget, for the past year, month-over-month services inflation, excluding housing, has been trending down.So are we out of the woods? No. Clearly, services inflation, excluding housing, is still high and needs to come down over time for the Fed to hit its target. But goods inflation and housing inflation were much bigger drivers of the surge in inflation. So, we really need to consider what's the path from here.Goods Inflation has been negative for the past few months, but used car prices look to have edged up a bit. Our US economics team expects the monthly change in core goods prices to be positive five basis points in January, interrupting that losing streak. We do not expect this reversion to last long, but the next couple of months could have some bumps in the path.Similarly, for housing inflation, the data on current new leases clearly points to a sharp deceleration in housing inflation over the rest of this year. Although overall housing inflation should come down, the closely watched component of owners' equivalent rent will likely stay elevated a bit longer and possibly give markets a bit of a head fake. The details matter, as always.The bottom line for us is twofold. First, inflation is coming down, but it will not be a smooth decline. A return to target for inflation was never very likely this year, so patience is required no matter what. Second, the recent high wage inflation does not spell failure for the Fed. Services inflation is not too far off target and the link between wages and inflation is there but it's small and both wage inflation and price inflation has been trending down despite the strong labor market.I conclude with what might be the most underappreciated moment from Chair Powell's public comments last week. He said he sees inflation getting close to 2% in 2024. When the FOMC did their projections in December, the median forecast was for 3.5% inflation at the end of this year. So, it seems like, based on the incoming data, Chair Powell might be pointing to a meaningful downward revision to the March forecast for inflation.Thanks for listening and if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

While the risk of economic contraction has lessened in a few regions, is the story of recession and market risk being oversimplified?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 10th at 2 p.m. in London. Markets have been fixated on the question of whether the U.S. and Europe will enter recession this year. With Europe benefiting from a fall in energy prices and the U.S. adding half a million jobs in January, it's tempting to think that recession risk is now lower and by extension, the risk to markets has passed. But the story may be more complicated. Near term, the risk of an economic contraction or recession has fallen. Europe has seen the largest swings here, where much lower energy prices, a result of a mild winter and plentiful supply from the United States, is leading to both less inflation and better growth, the proverbial 2-for-1 deal. Recession risk has also fallen a bit in the U.S., where our economists tracking estimate for U.S. GDP has been moving modestly higher. For markets, however, we fear that this story is getting oversimplified, to a recession is bad and no recession is good. At one level yes, avoiding a recession is definitely preferable. But markets often care most about the rate of change. It remains likely that U.S. growth will decelerate meaningfully this year, even in a scenario where a recession is avoided. For one, the idea that the U.S. avoids recession but still sees a meaningful slowdown in growth is the current forecast from Morgan Stanley's economists. And that's also the signal that we're getting from our market indicators. We classify an environment where leading economic data is strong but starting to soften as 'downturn'. That phase tends to see below average returns for stocks relative to bonds over the ensuing 6 to 12 months. We entered that phase recently. Of course, the U.S. economy has been defying predictions of a slowdown for many months now, and it could still have a few surprises up its sleeve. For now, however, we think favoring bonds over stocks is still consistent with our forecast for slowing growth, even if a recession is avoided. In Europe, we think the biggest beneficiary of lower energy prices and better growth prospects is the euro. What we think the euro performs well broadly, we think it does especially well versus the British pound, where economic challenges remain greater and our economists do forecast a recession this year. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or where ever you listen, and leave us a review. We'd love to hear from you.  

With the latest U.S. employment report showing unexpected resilience in the labor market, what happens now for the Fed and the policy tightening cycle?----- Transcript -----Welcome to Thoughts on the Market. I'm Vishy Tirupattur, Morgan Stanley's Head of Fixed Income Research and Director of Quantitative Research. Along with my colleagues, bringing you a variety of perspectives, today I will discuss the market implications from the latest U.S. employment report. It's Thursday, February 9th at noon in New York. When it comes to economic data releases, there are surprises and there are shockers. Last Friday's U.S. employment report was clearly in the latter category. Ahead of the release, the market consensus estimate was for 185,000 new jobs based on Bloomberg's survey of 77 economists. And yet the Bureau of Labor Statistics reported 517,000 new jobs added during the month, which is about eight and half standard deviations from the average expectation of the Bloomberg survey participants. By any measure, that's huge. The report showed strength across the board. Of course, there were some temporary drivers, like technical adjustments to seasonality factors, mild weather in January, and a resolution of certain strikes that contributed to this large scale boost to the January employment data. These things are unlikely to persist. Still, the U.S. labor market remains far more resilient than previously expected, with really no clear signs of stopping on the Monday following the January data release, Fed Chair Powell struck a more hawkish tone as he emphasized there is a significant road ahead before policymakers would be assured that inflation is returning to the 2% target. So what happens now? Even if the January employment report is not indicative of a change of trajectory in the U.S. labor market, it will likely take a few more months for the true underlying trends to emerge. Respecting the strength of the current labor market conditions, our U.S. economists believe that more evidence of labor market slowing is needed for the Fed to consider an end of the tightening cycle. Therefore, they now expect the Fed to deliver a 25 basis point hike, both in March and in May, that brings the peak policy rate to range of 5% to 5.25%, which would be in line with the FOMCs December projections. Given the change in the expectation for the Fed policy path, our strategists across multiple markets have revised many of our market goals. I would like to flag three key tactical changes. First, we turn neutral on U.S. Treasuries versus our previous overweight recommendation. Considering how big of an outlier the job number was, we think hard data is too strong for the Fed to look past it. With this realization, we think investors no longer assume that the interest rates have peaked. The market debate will likely turn into the interest rate sensitivity of the economy, and if the neutral rate should be higher than previously thought. Until we have greater clarity on these issues, we think being neutral is a better call on treasuries. Second, in the foreign exchange market, we turn neutral on the U.S. dollar, versus our previous call for a weakening dollar. The strong U.S. labor market data will likely cause investors to question whether the U.S. economy is slowing relative to the rest of the world. As a result, investors are likely to be a little more bullish in their U.S. dollar positioning. Third, in the agency mortgage market, we turned to underweight from neutral. The January employment report increases the uncertainty of the rate paths, which means higher interest rate volatility going forward, that's not great for agency MBS. Relative to other fixed income securities, we don't think investors are being compensated sufficiently for this higher interest rate uncertainty. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Following last night’s State of the Union Address by President Biden, what are some signals from the speech that investors should consider?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 8th at 10 a.m. in New York. Last night, President Biden delivered the annual State of the Union address to a joint session of Congress. Traditionally, this speech lays out the policy proposals of the administration. In the past, this hasn't signaled much, with only about 24% of proposals historically ending up enacted that year. As a recent 538.com study highlighted. But amidst the noise, there's some potential signal for investors to consider. Here's what we're watching. First, it's clear that U.S. policy will still drive the key investment themes of slowing globalization and the shift to a multipolar world. Biden's speech had much to say about the impact of recently enacted legislation like CHIPS+ and the Inflation Reduction Act, both of which included incentives to shift supply chains on key technologies back to the U.S. or friendly countries. One area this supports is the clean tech industry, which should see substantial demand for its U.S. produced products. Second, it's clear that investors need to keep paying attention to the debate on tech regulation. Biden referenced bipartisan antitrust legislation aimed at tech companies. While, as we previously discussed, there's a lot of details to be worked out before this type of legislation has a fighting chance of being enacted, the momentum behind it seems to be building. So it will be important to assess the impact of different types of regulation to large cap tech companies. Finally, and perhaps most important in the near term, the speech underscores something we've been flagging: the negotiation on how to raise the debt ceiling will be tricky and not solved in a timely manner. While calling for the debt ceiling to be raised without condition, Biden also seemed to concede there's room for negotiation on reducing the deficit. But in our view, that didn't signal a resolution was closer because the president also heavily referenced his desire for changes to the tax code to be part of that solution, something that's historically been a nonstarter for Republicans. In short, it appears in this negotiation so far, compromise has taken a backseat to rhetorical positioning by both sides. So as we stated here in the past, investors may want to prepare for an extended negotiation with a potentially late resolution, where knock-on effects to what is likely to be an already slowing economy are a distinct possibility. This is another reason our U.S. equity strategists continue to flag caution despite some solid recent performance in stocks. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

As the outlook for 2023 shows emerging markets looking better positioned than developed markets, how is Latin America faring in this more optimistic story? Chief Latin American Equity Strategist Gui Paiva and Chief Latin American Economist Andre Loes discuss.----- Transcript -----Gui Paiva: Welcome to Thoughts on the Market. I'm Gui Paiva, Morgan Stanley's Chief Latin American Equity Strategist.  Andre Loes: And I'm Andre Loes, Morgan Stanley's Chief LatAm Economist.  Gui Paiva: And on this special episode of the podcast, we will discuss this year's economic and equity outlook for Latin America. It is Tuesday, February 7th, at 10 a.m. in New York. Andre Loes:] And noon in Sao Paulo. Gui Paiva: By all accounts, last year was a difficult one for global markets. Yet so far, 2023 is starting on a brighter note. There are reasons to be more optimistic with moderating inflation and the outlook for China and Europe solidifying the case for a weaker U.S. dollar. Overall, emerging markets look better positioned than developed markets, and within EM today we'll take a look specifically at Latin America. Andre, to set the stage can you give us a sense of how Latin America has fared post-COVID, and how it has dealt with the big global challenges of 2022? Andre Loes: Well Gui, the growth performance of the region was not particularly different from the other regions during the bulk of the COVID slump. But the levels of poverty in LatAm were already high at the beginning of the pandemic and the increase in unemployment in 2020 and 2021 aggravated that situation. The erosion of purchasing power stemming from accelerating inflation played an important role as well, and the result was mounting strain for political proposals backing more unorthodox ideas, especially a permanent rise in fiscal spending. So the policy reaction aiming to control inflation has been deployed amid these more challenging contexts. Gui Paiva: Well, you just mentioned policy reaction. Indeed, with rampant inflation in the region, Latin American central banks were probably ahead of the global curve in 2022, having started hiking interest rates in 21. Andre, how effective has their monetary policy been so far and what are your expectations for the rate cycle from here? Andre Loes: Well, the response of LatAm central banks came quite early and has been proving effective in most countries. One of the reasons central bankers of the region react promptly is related to the inflation prone past of the region, which is still fresh in the mind of many economic agents, which leads to de-anchoring of inflation expectations as soon as observed inflation accelerates. This means central banks need to react timely, and as a result, the central banks of Brazil, Mexico, Chile and Peru started to hike rates still in the first half of 2021, with Colombia following early on the second half. With the exception of Colombia, inflation has peaked in all countries under our coverage where the central banks pursue an inflation target. With lower inflation we see an easy cycle is starting in all countries in the region, with Chile leading in the second quarter, Peru and Mexico in the third quarter, and Brazil and Colombia cutting towards year end. Gui Paiva: And what are your economic growth forecasts for the rest of this year and the longer term? Andre Loes: Growth in 2023 will show a deceleration compared to last year with both Brazil and Mexico slowing down from 3% in 2022 to 1.4% in the current year. Deceleration will be more intense in Argentina, Chile, and Colombia, with Chile effectively go into a strong recession, a contraction of around 2%, in order to regain both price and theoretical stability. Lower growth is mostly due to the lagged effects of the material monetary policy tightening we have just discussed. But lower global growth will also play a part on that, especially for Mexico, given the strong economic integration of this country with the U.S. For South America, China's recovery may prove a boon, as the Asian country is the main export destination for Brazil, Argentina, as well as the metro exporters Chile, Peru. But Gui, let me turn it over to you on the equities side. What are some of the key investment themes you are following this year? Gui Paiva: We forecast 20% dollar upside for Latin American equities in 2023. The reasons behind our optimism are the region's leverage to the global economic cycle and the price you currently pay for regional stocks. So let me expand on these topics. First about the leverage to the global economic cycle. Historically, LatAm equities tend to perform well during the early and mid stages of the global economic cycle. The region produces several important soft and hard commodities like grains, copper, steel and iron ore, as well as energy products like crude oil and natural gas. Therefore, a rising commodity prices produces a positive terms of trade sh

As new gene therapies are researched, developed and begin clinical trials, what hurdles must genetic medicine overcome before these therapies are commonly available? Head of U.S. Pharmaceuticals Terence Flynn and Head of U.S. Biotech Matthew Harrison discuss. ----- Transcript -----Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Head of U.S. Pharma for Morgan Stanley Research. Matthew Harrison: And I'm Matthew Harrison, Head of U.S. Biotech. Terence Flynn: And on this special episode of Thoughts on the Market, we'll be discussing the bold promise of genetic medicine. It's Monday, February 6th, at 10 a.m. in New York. Terence Flynn: 2023 marks 20 years since the completion of the Human Genome Project. The unprecedented global scientific collaboration that generated the first sequence of the human genome. The pace of research in molecular biology and human genetics has not relented since 2003, and today we're at the start of a real revolution in the practice of medicine. Matthew what exactly is genetic medicine and what's the difference between gene therapy and gene editing? Matthew Harrison: As I think about this, I think it's important to talk about context. And so as we've thought about medical developments and drug development over the last many decades, you started with pills. And then we moved into drugs from living cells. These are more complicated drugs. And now we're moving on to editing actual pieces of our genome to deliver potentially long lasting cures. And so this opens up a huge range of new treatments and new opportunities. And so in general, as we think about it, they're basically two approaches to genetic medicine. The first is called gene therapy, and the second is called gene editing. The major difference here is that in gene therapy you just deliver a snippet of a gene or pre-programmed message to the body that then allows the body to make the protein that's missing, With gene editing, instead what you do is you go in and you directly edit the genes in the person's body, potentially giving a long lasting cure to that person. So obviously two different approaches, but both could be very effective. And so, Terence, as you think about what's happening in research and development right now, you know, how long do you think it's going to be before some of these new therapies make it to market? Terence Flynn: As we think about some of the other technologies you mentioned, Matthew, those took, you know, decades in some cases to really refine them and broaden their applicability to a number of diseases. So we think the same is likely to play out here with genetic medicine, where you're likely to see an iterative approach over time as companies work to optimize different features of these technologies. So as we think about where it's focused right now, it's being primarily on the rare genetic disease side. So diseases such as hemophilia, spinal muscular atrophy and Duchenne muscular dystrophy, which affect a very small percentage of the population, but the risk benefit is very favorable for these new medicines. Now, there are currently five gene therapies approved in the U.S. and several more on the horizon in later stage development. No gene editing therapies have been approved yet, but there is one for sickle cell disease that could actually be approved next year, which would be a pretty big milestone. And the majority of the other gene editing therapies are actually in earlier stages of development. So it's likely going to be several years before those reach the market. As, again as we've seen happen time and time again in biopharma as these new therapies and new platforms are rolled out they have very broad potential. And obviously there's a lot of excitement here around these genetic medicines and thinking about where these could be applied. But I think before we go there, Matthew, obviously there are still some hurdles that needs to be addressed before we see a broader rollout here. So maybe you could touch on that for us. Matthew Harrison: You're right, there are some issues that we're still working through as we think about applying these technologies. The first one is really delivery. You obviously can't just inject some genes into the body and they'll know what to do. So you have to package them somehow. And there are a variety of techniques that are in development, whether using particles of fat to shield them or using inert viruses to send them into the body. But right now, we can't deliver to every tissue in every organ, and so that limits where you can send these medicines and how they can be effective. So there's still a lot of work to be done on delivery. And the second is when you go in and you edit a gene, even if you're very precise about where you want to edit, you might cause some what we call off target effects on the edges of where you've edited. And so there's concern about could those off target

After a year of falling assets, 2023 has started strong for global markets. Chief Cross-Asset Strategist Andrew Sheets outlines which markets could sustain their momentum.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, February 3rd at 2 p.m. in London. 2022 was a year where almost all assets fell. 2023 so far has been the opposite. Stocks in China, Japan, Europe and the U.S. are all off to unusually good starts. Meanwhile, U.S. long term bonds have actually risen more than the stock market. But behind this widespread strength are some rather different stories. I want to talk through these and how they inform our view of where this strength could continue, or not. One set of strength is coming out of Asia, where China's reopening from COVID has been much more aggressive than expected. This is a material change of policy in the world's second largest economy, which has persisted despite a large initial rise in case numbers. That persistence has made our analysts more confident that large amounts of consumer spending could still be unlocked. While valuations in emerging markets and China equities have risen as a result of this reopening, we think they remain reasonable, and therefore our overweight equities in China, Korea and Taiwan. The second story is Europe. China's rebound is part of the narrative here, but we think a larger driver is energy. A mild winter and abundant supplies of U.S. LNG have caused the price of natural gas in Europe to fall by more than 60% since early December, and by more than 80% since late August. This decline has specific benefits reducing inflation while simultaneously easing pressures on economic growth, a proverbial win-win. But falling energy prices also have a more general benefit. For much of the last six months, the specter of a severe energy shortage has hung over Europe, discouraging investment. With the existential threat of energy shortages easing, the region is once again attracting capital. Flows by U.S. investors into European stock ETFs, for example, is on the rise, and we think continued investment flows into the region will help boost the euro. The third story, the U.S. story, is different still. Better growth in China and Europe are part of this, but we think the bigger issue is growing confidence of a so-called soft landing, where growth slows enough to reduce inflation, but not so much to cause a recession. That soft landing scenario is the base case forecast of Morgan Stanley's economists. But on several key variables, major uncertainties remain. On the one hand, the index of economic leading indicators or measures of new manufacturing orders have been surprisingly weak. But today's U.S. labor market report was extremely strong, with the lowest unemployment rate since 1969. And while inflation has been easing, every update here will remain important, including the next reading of the Consumer Price Index on February 14th. Global markets have been almost universally strong, but the drivers are quite different. We think the stories in Asia and Europe have the best chance of persisting throughout the year, while the U.S. story remains more data dependent. Stay tuned. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

Emerging markets are turning bullish and China’s reopening leaves room for an increase in consumption. What sectors and industries might benefit from this upturn?----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and emerging market equity strategist at Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, in this episode I'll explain why the bull market in emerging market equities is still young. It's Thursday, 2nd of February at 8 a.m. in Singapore. In our view, the bull market in emerging market equities is still young. We entered a bull market, conventionally defined as up 20% from the trough, in the second week of January, having completed the bear market in mid-October. And bull markets typically last at least a year in our asset class, although the pace of recent market gains will probably slow. Unlike the U.S. market, earnings estimates revisions in Asia and emerging markets are now inflecting upwards, and that's why emerging equities are performing U.S. equities more rapidly even than in early 2009. And we think this outperformance is likely to continue a while longer. As we've entered a bull market the 52 week rolling beta, or measure of correlation of emerging markets versus U.S. equities, has undergone a regime shift falling from around 0.8 times in the third quarter last year to just 0.4 times currently. And even more striking, the beta of the Hang Seng index, at the leading edge of the current bull market in our asset class, compared to the S&P 500 has fallen close to zero. This is lower than at any point in the last 30 years of data and speaks to an environment of extreme decoupling and performance. These factors have led us to raise our growth stock exposure in recent months. Particularly in North Asia ex-Japan, so that's China, Korea and Taiwan, we expect those markets to continue to outperform, as is typical in the early phases of a bull market, whilst we expect Southeast Asian markets, ASEAN and India, which were defensive outperformers during the bear market to underperform as the bull market gets going. On the sector side, we're overweight semiconductors and technology hardware and think that the fourth quarter of 2022 was the trough for industry fundamentals, with recovery expected in the second half of this year as inventory reduces and demand recovers, particularly in China. Whilst we praised our emerging markets and China targets several times in recent months, we recently cut our Japan target for TOPIX given the headwind of yen strength. And we prefer Japan banks to the overall market as they're one of the few sectors that's positively leveraged to a stronger yen. Finally, we'd like to emphasize that China reopening is probably going to be more V-shaped than the consensus expects, with substantial excess savings in consumer pockets likely to support consumption through this year. Now, this factor is prima facie more bullish the energy sector, which we're also overweight, than the broad materials sector, which is more leveraged to property demand in China, which we think will be slower to recover. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and recommend Thoughts on the Market to a friend or colleague today. 

As reports that the White House may be considering more impactful approaches to Chinese investment restrictions reach investors, how much should they be reading into these policy deliberations?----- Transcription -----Welcome to Thoughts on the Market. Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, February 1st at 10 a.m. in New York. The influence of U.S. policy deliberations on financial markets was once again on display this week. Fresh reports that the White House continues to consider implementing rules that would restrict some investments in China, shouldn't surprise regular listeners of this podcast. After all, the U.S. government has been quite public about its intention to keep U.S. resources from supporting the development of key technologies in China deemed critical to U.S. economic and national security. But what might be a bit surprising was a report suggesting that one approach to achieving this goal could be quite different than many anticipated. In particular, the White House is reportedly considering blanket bans on investing in certain sectors of concern, rather than a tailored investment by investment review. Following the news, China equity markets have moved lower and many of our clients see a link. However, we think investors shouldn't read too much into one media report. We emphasize that the media reports on this topic are full of hedged and subjective language. While it could very well be true that the administration is considering this more severe approach, policy deliberations of all kinds typically consider multiple options. So, the consideration of this approach doesn't inherently mean it's the most likely outcome. But we do think one reliable read through from this report is that the U.S. is likely to enact some form of investment restrictions with regard to China. So investors do need to grapple with what this could mean. It could drive concern among investors around impacts to tech concentrated and R&D heavy sectors of the China equity markets. But also consider that such actions underscore emerging opportunities in geographies our colleagues have become quite positive on, like Mexico and India, markets that could benefit from U.S. multinationals having to shift new tech sensitive production away from China. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show. 

As the data continues to show a weakness in inflation, is it enough to convince investors that the Fed may turn dovish on monetary policy? And how are these expectations impacting Treasury yields?----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Morgan Stanley's Global Head of Macro Strategy. Along with my colleagues, bringing you a variety of perspectives, today I'll talk about expectations for the Fed's monetary policy this year, and its impact on Treasury yields. It's Tuesday, January 31st at 10 a.m. in New York. So far, 2023 seems to be 2022 in reverse. High inflation, which defined most of last year, seems to have given way to a narrative of rapidly declining inflation. Wages, the Consumer Price index, data from the Institute of Supply Management, or ISM, and small business surveys all suggest softening. And Treasury markets have reacted with a meaningful decline in yield. We've now had three consecutive inflation reports, I think of them as three strikes, that did not highlight any major inflation concerns, with two of the reports being outright negative surprises. The Fed hasn't quite acknowledged the weakness in inflation, but will the third strike be enough to convince investors that inflation is slowing, so much so that the Fed may change its view on terminal rates and the path of rates thereafter? We think it is. With inflation likely on course to miss the Fed's December projections, the Fed may decide to make dovish changes to those projections at the March FOMC meeting. And in fact, the market is already pricing a deeper than expected rate cutting cycle, which aligns with the idea of lower than projected inflation. In anticipation of the March meeting, markets are pricing in nearly another 25 basis point rate hike, while our economists see a Fed that remains on hold. The driver of our economists view is that non-farm payroll gains will decelerate further, and core services ex housing inflation will soften as well, pushing the Fed to stay put with a target range between 4.5% and 4.75%.In addition to all of this, it has become clear from our conversations with investors, and recent price action, that the markets of 2022 left fixed income investors with extra cash on the sidelines that's ready to be deployed in 2023. That extra cash is likely to depress term premiums in the U.S. Treasury market, especially in the belly -or intermediate sector- of the yield curve. Given these developments, we have revised lower our Treasury yield forecasts. We see the 10 year Treasury yield ending the year near 3%, and the 2 year yield ending the year near 3.25%. That would represent a fairly dramatic steepening of the Treasury yield curve in 2023. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.

Stocks have seen a much better start to 2023 than anticipated. But can this upswing continue, or is this merely the last bear market rally before the market reaches its final lows?----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 30th and 11 a.m. in New York. So let's get after it. 2023 is off to a much better start than most expected when we entered the year. Part of this was due to the fact that the consensus had adopted our more bearish view that we pivoted back to in early December. Fast forward three weeks, however, and that view has changed almost 180 degrees, with most investors now adopting the new, more positive narrative of the China reopening, falling inflation and U.S. dollar and the possibility of a Fed pause right around the corner. While we acknowledge these developments are real net positives, we remind listeners that these were essentially the exact same reasons we cited back in October when we turned tactically bullish. However, at that point, the S&P 500 was trading 500 points lower with valuations that were almost 20% lower than today. In other words, this new narrative that seems to be gaining wider attention has already been priced in our view. In fact, we exited our tactical trade at these same price levels in early December. What's happening now is just another bear market trap in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out. This FOMO has only been exacerbated by our observation that most missed the rally from October to begin with, and with the New Year beginning they can't afford to not be on the train if it's truly left the station. Another reason stocks are rallying to start the year is due to the January effect, a seasonal pattern that essentially boost the prior year's laggards, a pattern that can often be more acute following down years like 2022. We would point out that this past December did witness some of the most severe tax loss selling we've seen in years. Prior examples include 2000-2001, and 2018 and 19. In the first example, we experienced a nice rally that faded fast with the turn of the calendar month. The January rally was also led by the biggest laggards, the Nasdaq handsomely outperformed the Dow and S&P 500 like this past month. In the second example, the rally in January did not fade, but instead saw follow through to the upside in the following months. The Fed was pivoting to a more accommodative stance in both, but at a later point in the cycle in the 2001 example, which is more aligned with where we are today. In our current situation we have slowing growth and a Fed that is still tightening. As we have noted since October, we agree the Fed is likely to pause its rate hikes soon, but they are still doing $95 billion a month in quantitative tightening and potentially far from cutting rates. This is a different setup in these respects from January 2001 and 2019, and arguably much worse for stocks. A Fed pause is undoubtedly worth some lift to stocks, but once again we want to remind listeners that both bonds and stocks have rallied already on that conclusion. That was a good call in October, not today. The other reality is that growth is not just modestly slowing, but is in fact accelerating to the downside. Fourth quarter earnings season is confirming our negative operating leverage thesis. Furthermore, margin headwinds are not just an issue for technology stocks. As we have noted many times over the past year, the over-earning phenomena this time was very broad, as indicated by the fact that 80% of S&P 500 industry groups are seeing cost growth in excess of sales growth. Bottom line, 2023 is off to a good start for stocks, but we think this is simply the next and hopefully the last bear market rally that will then lead to the final lows being made in the spring, when the Fed tightening from last year is more accurately reflected in both valuations and growth outlooks. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

Investing is all about choices, so what should investors know when choosing between holding a financial asset or cash?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 27th at 2 p.m. in London. Investing is about choices. In any market at any moment, an investor always has the option to hold a financial asset, like stocks or bonds, or hold cash. For much of the last decade, cash yielded next to nothing, or less than nothing if you were in the Eurozone. But cash rates have now risen substantially. 12-month Treasury bills now yield about 2.5% more than the S&P 500. When an asset yields less than what investors earn in cash, we say it has negative carry. For the S&P 500 that carry is now the worst since August of 2007. But this isn't only an equity story. A U.S. 30 year Treasury bond yields about 3.7%, much less than that 12 month Treasury bill at about 4.5%. Buying either U.S. stocks or bonds at current levels is asking investors to accept a historically low yield relative to short term cash. Just how low? For a 60/40 portfolio of the S&P 500 and 30 year Treasury bonds the yield, relative to those T-bills, is the lowest since January of 2001. To state the obvious low yields relative to what you can earn in cash isn't great for the story for either stocks or bonds. But we think bonds at least get an additional price boost if growth and inflation slow in line with our forecasts. It also suggests one may need to be more careful about picking one's spots within Treasury maturities. For example, we think 7 year treasuries look more appealing than the 30 year version. For stocks, we think carry is one of several factors that will support the outperformance of international over U.S. equities. Many non-U.S. stock markets still offer dividend yields much higher than the local cash rate, including indices in Europe, Japan, Taiwan, Hong Kong and Australia. This sort of positive carry has historically been a supportive factor for equity performance, and we think that applies again today. Investing is always about choices. For investors, rising yields on cash are raising the bar for what stocks and bonds need to deliver. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

European equities have been outperforming U.S. stocks. What’s driving the rally, and will it continue?----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Sacker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the recent outperformance of European equities and whether this could be the start of a longer upturn. It's Thursday, January the 26th at 4 p.m. in London. After a tricky period through last summer, the fourth quarter of 2022 saw European equities enjoy their best period of outperformance over U.S. stocks in over 30 years. Such was the size of this rally that MSCI Europe ended last year as the best performing region globally in dollar terms for the first time since 2000. In addition, the relative performance of Europe versus U.S. stocks has recently broken above its hundred week moving average for the first time since the global financial crisis. We do not think this latter event necessarily signals the start of a multi-year period of European outperformance going forward, however we do think it marks the end of Europe's structural underperformance that started in 2008. When we analyze the drivers behind Europe's recent rally, we can identify four main catalysts. Firstly, the economic news flow is holding up better in Europe than the U.S., with traditional leading indicators such as the purchasing managers surveys stabilizing in Europe over the last few months, but they continue to deteriorate in the U.S. Secondly, European gas prices continue to fall. After hitting nearly $300 last August, the price of gas is now down into the $60's and our commodity strategist Martin Rats, forecasts it falling further to around $20 later this year. Thirdly, Europe is more geared to China than the U.S., both economically and also in terms of corporate profits. For example, we calculate that European companies generate around 8% of their sales from China, versus just 4% for U.S. corporates. And then lastly, companies in Europe have enjoyed better earnings revisions trends than their peers in the U.S., and that does tend to correlate quite nicely with relative price performance too. The one factor that has not contributed to Europe's outperformance is fund flows, with EPFR data suggesting that European mutual fund and ETF flows were negative for each of the last 46 weeks of 2022. A consistency and duration of outflows we haven't seen in 20 years, a period that includes both the global financial crisis and the eurozone sovereign debt crisis. While the pace of recent European equity outperformance versus the U.S. is now tactically looking a bit stretched, improving investor sentiment towards China and still low investor positioning to Europe should continue to provide support. In addition, European equities remain very inexpensive versus their U.S. peers across a wide variety of metrics. For example, Europe trades at a 29% discount to the U.S. on a next 12 month price to earnings ratio of less than 13 versus over 17 for the S&P. European company attitudes to buybacks have also started to change over the last few years, such that we saw a record $220 billion of net buyback activity in 2022, nearly double the previous high from 2019. At 1.7%. Europe's net buyback yield does still remain below the U.S. at around 2.6%. However, when we combine dividends and net buybacks together, we find that Europe now offers a higher total yield than the U.S. for the first time in over 30 years. For those investors who are looking to add more Europe exposure to their portfolios, first we are positive on luxury goods and semis. Two sectors in Europe that should be beneficiaries of improving sentiment towards China, and our U.S. strategists forecast that U.S. Treasury yields are likely to move down towards 3%. A move lower in yields should favor the longer duration growth stocks, of which luxury and semis are two high profile ones in Europe. Secondly, we continue to like European banks, given a backdrop of attractive valuations, high cash returns and superior earnings revisions. Third, we prefer smaller mid-caps over large caps given that the former traditionally outperform post a peak in inflation and in periods of euro currency strength. Our FX strategists expect euro dollar to rise further to 115 later this year. The bottom line for us is that we think there is a good chance that the recent outperformance of Europe versus U.S. equities can continue as we move through the first half of 2023. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today. 

Last week, the U.S. Treasury hit the debt ceiling. How will markets respond as Congress decides how to move forward? Chief Cross-Asset Strategist Andrew Sheets and Head of Global Thematic and Public Policy Research Michael Zezas discuss.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross-Asset Strategist. Michael Zezas: And I'm Michael Zezas, Head of Global Thematic and Public Policy Research. Andrew Sheets: And on this special episode of the podcast, we'll be discussing the U.S. debt ceiling. It's Wednesday, January 25th at 2 p.m. in London. Michael Zezas: And 9 a.m. in New York. Andrew Sheets: Mike, it's great to be here with you. I'm sure many listeners are familiar with the U.S. debt ceiling, but it's still probably worthwhile to spend 30 seconds on what it is and what hitting the debt ceiling really means. Michael Zezas: Well, in short, it means the government hit its legal limit, as set by Congress, to issue Treasury bonds. And when that happens, it can't access the cash it needs to make the payments it's mandated to make by Congress through appropriations. Hitting this limit isn't about the U.S. being unable to market its bonds, it's about Congress telling Treasury it can't do that until Congress authorizes it to have more bonds outstanding. Now, we hit the debt ceiling last week, but Treasury can buy time using cash management measures to avoid running out of money. And so what investors need to pay attention to is what's called the X date. So that's when there's actually not enough cash left on hand or coming in to pay all the obligations of the government. At that point, Treasury may need to prioritize some payments over others. That X date, it's a moving target and right now the estimates are that it will occur sometime this summer. Andrew Sheets: So I often see the debt ceiling and government shutdowns both used as reference points by investors, but the debt ceiling and government shutdowns are actually quite different things, right?Michael Zezas: That's right. So take a step back, the easiest way to think about it is this: Congress makes separate laws dictating how much revenue the government can collect, so taxes, how much money the government has to spend, and then how much debt it's allowed to incur. So within that dynamic, a debt ceiling problem is effectively a financing problem created by Congress. This problem eventually occurs if Congress' approve spending in excess of the tax revenue it's also approved, that makes a deficit. If, in that case, if Congress hasn't also approved a high enough level of debt to allow Treasury to meet its legal obligation to make sure Congress's approved spending gets done. And if then you also pass the X date, you're unable to fund the full operations of the government, potentially including principal and interest on Treasury bonds. But alternately a government shutdown, that's a problem if Congress doesn't authorize new spending. So if Congress says the government's authorized to spend X amount of dollars until a certain date, after that date, the government can't legally spend any more money with the exception of certain mandated items like principal and interest and entitlement programs. So in that case, the government shuts down until Congress can agree on a new spending plan.Andrew Sheets: So, Mike, let's bring this forward to where we are today in the current setup. How would you currently summarize the view of each camp when it comes to the debt ceiling? Michael Zezas: Well, Republicans say they won't raise the debt ceiling unless it comes with future spending cuts to reduce the budget deficit. Democrats say they just want a clean, no strings attached hike to the debt ceiling because the debate about how much money to spend is supposed to happen when Congress passes its budget, not afterwards, using the government's creditworthiness as a bargaining chip. But these positions aren't new. What's new here are two factors that we think means investors need to take the debt ceiling risk more seriously than at any point since the original debt ceiling crisis back in 2011. The first factor is that like in 2011, the debt ceiling negotiation is happening at a time when the U.S .economy is already flirting with recession. So any debt ceiling resolution that ends with reduced government spending could, at least in the near-term, cause some market concern that GDP growth could go negative. The second factor is the political dynamic, which is trickier than at any point since 2011. So Democrats control the White House and Senate, where Republicans have a slim majority in the House. And House Speaker Kevin McCarthy, he's in a tenuous position. So per the rules he agreed to with his caucus, any one member can call for a vote of no confidence to try and remove him from the speakership. And public reports are that he promised he wouldn't allow the debt ceiling to be ra

As economic pressures continue to drive consumption in the U.S., how will the health of the economy influence the soft lines industry? Head of Retail and Consumer Credit for Fixed Income Research Jenna Giannelli and U.S. Soft Lines Retail Equity Analyst Alex Straton discuss----- Transcript -----Jenna Giannelli: Welcome to Thoughts on the Market. I'm Jenna Giannelli, Head of Retail and Consumer Credit within Morgan Stanley's Fixed Income Research. Alex Straton: And I'm Alex Straton, Morgan Stanley's U.S. Soft Lines Retail Equity Analyst. Jenna Giannelli: And on this special episode of Thoughts on the Market we'll discuss soft lines from two different but complementary perspectives, equity and corporate credit. It's Tuesday, January 24th at 10 a.m. in New York. Jenna Giannelli: Our economists here at Morgan Stanley believe that tighter monetary policy and a slowing labor market will be the key drivers of consumption in the U.S. this year. Against this still uncertain backdrop where we're cautious on the health of the U.S. consumer, we're at an interesting moment to think about the soft lines industry. So let's start with the equity side. Alex, you recently said that you see 2023 as a 'tale of two halves' when it comes to soft lines. What do you mean by that and when do you see the inflection point? Alex Straton: So, Jenna, that's right, we are describing 2023 as a 'tale of two halves'. That's certainly one of the taglines we're using, the other being 'things are going to go down before they go up'. So let's start with a 'tale of two halves'. I say that because in the first half what retailers are facing are harder compares from a PNL perspective, an ongoing excess inventory overhang and likely recessionary conditions from a macro perspective. On top of that, what we've got is 2023 street EPS estimates sitting about 15% too high across our coverage. As we know, earnings revisions are the number one driver of stock prices in our space. So if we have negative revisions ahead, it's likely that we're also going to have our stocks move downwards, hence the bottom I'm calling for some time here in the first quarter, while that may seem like a pretty negative view to start the year, the story is actually very different when we move to the back half of the year. Hence, the 'tale of two halves' narrative and the 'down before up'. So what do I mean by that? In the back half, really, what we're facing is retailers with easier top line compares and returns that should enjoy year over year margin relief. That's on freight, cotton, promotions, there's a number of others there. On top of that, what we've got is inventory that should be mostly normalized. And then finally a recovering macro, I think with this improving backdrop and the fact that our stocks are the quintessential early cycle outperformers, they could quickly pivot off these bottoms and see some nice gains. Jenna Giannelli: Okay, Alex, that all makes a lot of sense. So what are the key factors that you're watching for to know when we've hit that bottom? Alex Straton: So on our end, it's really a few things. I think first it's where 2023 guidance comes in across our space. And, I think secondly, its inventory levels. Cleaner levels are essential for us to have a view on how long this margin risk we've seen in the back half of 2022 could potentially linger into this year. And then really finally, it's a few macro data points that will confirm that, you know, a recession is here, an early cycle is on the horizon. Jenna Giannelli: I mean, look, you touched on a bit just on inventory, but last year there was a lot of discussion around the inventory problem, right, which was seen as a key risk to earnings with oversupply, lagging demand weighing on margins. Where are we, in your view, on this issue now? And specifically, what is your outlook on inventory for the rest of the year? Alex Straton: So look, retailers and department stores, they made really nice progress in the third quarter. They worked levels down by about a little over ten points. But then from the preannouncements we had at ICR and using our work around our expectations for inventory normalization, it really seems like retailers might be able to bring that down by another ten points in the fourth quarter. But even though, you know, this rate of trend and clean up is good and people are getting a little bullish on that, I wouldn't say we're clean by any means. Inventory  to forward sales spreads are still nearly just as wide as they were at the peak of last year. And to give people a perspective there, what a retailer wants to be to assume that inventory levels are clean is that the inventory growth should be in line with forward sales growth. But I think looking ahead, you know, department stores could be in good shape as soon as this upcoming quarter, that's a fourth quarter, so really remarkable there. It'll then probably be followed by the specialty retai

While there seemed to be a consensus that U.S. Equities will struggle through the first half of the year before finishing strong, views are now varying on the degree and timing of a potential recession.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 23rd at 11am in New York. So let's get after it. Coming into this year, the number one investor concern was that everyone seemed to have the same outlook for U.S. equities - a tough first half followed by a strong finish. Views varied on the degree of the drawdown expected and magnitude of the rebound, but a majority expected a U.S. recession to begin sooner rather than later. Fast forward just a few weeks and the consensus view has shifted materially, particularly as it relates to the recession view. More specifically, while more investors are starting to entertain a soft landing for the economy, many others have pushed out the timing of a recession to the second half of the year. This change is due in part to China's reopening gaining steam and the sharp decline in European natural gas prices. While these are valid considerations for investors to modify their views, we think that price action has been the main influence. The rally this year has been led by low quality and heavily shorted stocks. It's also witnessed a strong move in cyclical stocks relative to defensive ones. This cyclical rotation in particular is convincing investors they are missing the bottom and they must reposition. Truth be told, it has been a powerful shift, but we also recognize that bear markets have a way of fooling everyone before they're done. The final stages of the bear are always the trickiest. In bear markets like last year, when just about everyone loses money, Investors lose confidence. They question their process as the price action and cross-currents in the data create a hall of mirrors. This hall of mirrors only increases the confusion. This is exactly the time one must trust their own work and ignore the noise. Suffice it to say we're not biting on this recent rally because our work in process is so convincingly bearish on earnings. Importantly, our call on earnings is not predicated on the timing of a recession or even if one occurs this year. Our work continues to show further erosion with the gap between our model and the forward estimates as wide as it's ever been. Could our model be wrong? Of course, but given its track record, we don't think it will be wrong directionally, particularly given the collection of leading series and models we published that point to a similar outcome. This is simply a matter of timing and magnitude, and we think the timing is imminent. We find the shift in investor tone helpful for our call for new lows in the S&P 500, which will finish this bear market later this quarter or early in the second quarter. Getting more specific, our forecasts are predicated on margin disappointment and the evidence in that regard is increasing. When costs are growing faster than sales, margins erode. This is very typical during any unexpected revenue slowdown. Recessions in particular lead to significant negative operating leverage for that very reason. In other words, sales fall off quickly and unexpectedly, while costs remain sticky in the short term. Inventory bloating, less productive headcount and other issues are the primary culprits. This is exactly what is happening in many industries already, and this is without a recession. It's also right in line with our forecast and the thesis that companies would regret adding costs so aggressively a year ago when sales and demand were running so far above trend. Bottom line, after a very challenging 2022, many investors are still bearish fundamentally, but are questioning whether negative fundamentals have already been priced into stocks. Our view has not changed as we expect the path and earnings in the U.S. to disappoint the consensus, expectations and current valuations. In fact, we welcome the change in sentiment positioning over the past few weeks as a necessary development for the last stage of this bear market to play out. Bear markets are like a hall of mirrors designed to confuse investors and take their money. We advise staying focused on the fundamentals and ignoring the false signals and misleading reflections. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

The financial landscape is filled with predictions about what comes next for markets, but how do investors use these forecasts to put a portfolio together?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 20th at 2 p.m. in London. The financial landscape is filled with predictions about what markets will do. But how are these predictions used? Today, I want to take you through a quick journey through how Morgan Stanley research thinks about forecasting, and how those numbers can help put a portfolio together. Forecasting is difficult and as such it's always easier to be more vague when talking about the future. But when we think about market expectations, being specific is essential. That not only gives an expectation of which direction we think markets will go, but by how much and over a specific 12 month horizon. Details here can also really matter. For example, making sure you add dividends back to equity returns, adjusting bond forecasts for where the forwards are, and thinking about all asset classes in the same currency. In this case, U.S. dollars. Consistency in assumptions is another factor that is difficult but important. We try to set all of our forecasts to scenarios from our global economics team. That is more likely to produce asset class returns that are consistent with each other and to the economy we expect. With these returns in hand, we can then ask, "what's an optimal asset allocation based on our forecasts?" Now, everyone's investment objectives are different. So in this case we'll define optimal as a portfolio that will generate higher returns than a benchmark with a similar or better ratio of return to volatility. This type of analysis will consider expected return and historical risk, but also how well different asset classes diversify each other. As Morgan Stanley's forecasts currently stand this approach suggests U.S. equities are relatively unattractive. Sitting almost exactly at the year end price target of my colleague Mike Wilson, our U.S. Equity Strategist, expected returns are low, while volatility is high and U.S. stocks offer minimal benefits for diversification. Stocks in Japan and emerging markets look better by comparison. But the real winner of this approach continues to be fixed income. Morgan Stanley's rate strategists in the U.S. and Europe continue to think that moderating inflation in 2023 will help bond yields either hold around current levels, or push lower, resulting in returns that are better than equities with less volatility. Our expected returns for emerging market bonds are also higher, with less volatility than U.S. and European stocks. Forecasting the future is difficult, and it's very possible that either our market forecasts or the economic assumptions to back them will be off to some degree. Still, considering what is optimal based on these best estimates, is a useful anchor when thinking about strategy. And for the moment, this still favors bonds over stocks. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

With housing data from the last few months of 2022 coming in weaker than expected, what might be in store for mortgage investors? Co-Heads of U.S. Securitized Products Research Jim Egan and Jay Bacow discuss.----- Transcript -----Jim Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Co-Head of U.S. Securitized Products Research here at Morgan Stanley. Jay Bacow: And I'm Jay Bacow, the other Co-Head of U.S. Securitized Products Research. Jim Egan: And on this episode of the podcast, we'll be discussing the U.S. housing and mortgage markets. It's Thursday, January 19th at 11 a.m. in New York. Jay Bacow: So, Jim, the housing data hasn't been looking all that great recently. We've talked about this bifurcated outlook for the U.S. housing market, still holding that view? Jim Egan: So to catch people up, the bifurcated housing narrative was between housing activity. And by that we mean sales and housing starts and home prices. We thought there was going to be a lot more weakness in sales and starts at the end of 2022 and throughout 2023, then home prices, which we thought would be more protected. Since we came out with that outlook, it's safe to say that sales have been materially weaker than we thought they'd be. To put that into a little bit of context, existing home sales for the most recent month of data, which was November, showed the largest year over year decrease for that time series since the early 1980s. Pending home sales, we only have that data going back to 2001, but pending home sales just showed their weakest November in the entire history of that time series, so weaker than it was during the great financial crisis. Now, Jay, when we talk about those kind of weaker than anticipated sales volumes, what does that mean for your markets? Jay Bacow: Right. So while homeowners clearly are going to care about home prices, mortgage investors care more about the housing activity. And they care about that because that housing activity, those home sales, that results in supply to the market and it actually results in supply to the market from two different sides. There's the organic net supply from home sales. And then furthermore, because the Fed is doing QT, the faster the pace of home sales, the more the Fed balance sheet runoff is. And so as those home sales numbers come down, you get less supply to the market, which is inarguably good for mortgage investors. Now, the problem is mortgage spreads have repriced to reflect that at this point. Jim Egan: Now Jay, a lot of things have repriced. Jay Bacow: Right. And I think the question now is, is that going to keep up? But turning it over to you, what's causing this slowdown in home sales? And do we think that's going to continue? Jim Egan: I think in a word, it's affordability. A lot of the underlying premises behind our bifurcated narrative, we still see those there they're just impacting the market a little bit more than we thought they would. From an affordability perspective, and we've said this on this podcast before, the monthly mortgage payment as a percentage of household income has deteriorated more over the past year than really any year we have on record. From a numbers perspective, that payment's gone up over $700. That's a 58% increase. That's making it more difficult for first time buyers to buy homes and therefore pulling sales activity down. But where the bifurcation part of this narrative comes from, a lot of current homeowners have very low, call it maybe 3-3.5%, 30 year fixed rate mortgages. They're not incentivized to list their homes in this current environment and we're seeing that. Listing volumes are close to 40 year lows. In a month in which sales fall as sharply as they just did, we would expect months of supply at least to move higher and that roughly stayed flat. And so you have this lack of inventory, people aren't selling their homes, that means they're also not buying a home on the follow which pulls sales volumes down, leading to some of those numbers we talked about on top of just how long it's been since we've seen sales fall as sharply as they have. But on the other side of the equation, that's also keeping home prices a little bit more protected. Jay Bacow: Okay. So you mentioned affordability is impacting home sales, but then what's happening to actual home prices? Are they holding up then? Jim Egan: We think they will now. Don't hear what I'm not saying, that doesn't mean that home prices keep climbing. It just means that the pace with which they're going to slow down or the pace with which they're going to fall isn't as substantial as what we're going to see on the activity front. Now year over year HPA most recently up 9.2%. We think in the next month's print, that's going to slow to a little bit below 8% down to 7.9%. On a month over month basis from peak in June of 2022, home prices are off 3%. We think they'll fall a further 4% in 2023. But to kind of put so

At a recent meeting of analysts from around the globe, we identified three central transitions for 2023 that may help investors shift towards a focus on long-term trends as opportunities.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, January 18th at 10 a.m. in New York. What do you get when 45 global research analysts gather in a room for two days to debate secular market trends? A plan. In particular, a plan to deal with a world where key underpinnings of the global political economy are changing rapidly. For investors, we think that means concentrating on multi-year secular trends as an opportunity. In markets where short-term focus has become the norm, it stands to reason that there's less competition and more potential outperformance to be earned by analyzing the market impacts of longer-term trends. That's why we recently gathered analysts from around the globe to identify the key secular themes that Morgan Stanley research should focus on this year. The agenda for our meeting included over 30 topics, but the discussion gravitated around a smaller subset of themes whose potential market impact was substantial, but perhaps beyond what analysts could plausibly perceive or analyze individually. Understanding these three global transitions appeared central to the questions of inflation, interest rates and the structure of markets themselves. The first is rewiring global commerce for a multipolar world, one with more than one meaningful power base and commercial standard, where companies and countries can no longer seek efficiencies through global supply chains and market access without factoring in geopolitical risks. We've spoken much about that in this space, but our analysts believe the practical implications of this trend are not yet well understood. The second is decarbonization. While this isn't a new theme, we think investors need to shift from debating whether it will be meaningfully attempted to sizing up the impact of that attempt. After all, 2022 saw both U.S. and European policymakers putting the power of government behind decarbonization. Now we'll focus on helping investors grapple with both the positive and negative market impacts of this transition, which the International Energy Agency estimates could cost about $70 trillion over the next 30 years. Identifying the companies, sectors and macro markets that will benefit, or face fresh challenges, is thus essential work. Finally, we'll remain focused on tech diffusion. Once again, not a new theme, but what is new is the speed and breadth with which tech diffusion can impact sectors that were previously untouched. Fragmented industries or those with high regulatory barriers look poised for a multi-year transition via tech diffusion. Opportunities may appear in finance, health care and biopharma. We expect the next five years of tech diffusion to move meaningfully faster than the last five, and so we'll focus on delivering important market related insights. So, you'll be hearing more from us over the course of 2023 on these three transitions and their impacts on markets. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

At the start of each new year, we identify 10 overarching themes for the year and beyond. So what should investors be keeping an eye on in the coming months?----- Transcript -----Welcome to Thoughts on the Market. I'm Ed Stanley, Morgan Stanley's Head of Thematic Research in Europe. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing 10 key themes for 2023. It's Tuesday, January the 17th at 2 p.m. in London. At the start of the New Year, we identify 10 overarching, long-term themes that we believe will command investor attention throughout the year and beyond. If you're a regular listener to the show, you may have heard my colleagues and I discussing some of these topics over the past year. We will certainly revisit them in 2023 as we develop new insights, but let me offer you a roadmap to navigate these themes in the coming months. First, company earnings and margins are likely to come under pressure this year as pricing power declines and costs remain sticky. Both the U.S. and Europe look at risk from this theme. The S&P 500 earnings will likely face significant pressure and enter an earnings recession, and Europe earnings similarly will likely fall 10%. Second is inflation. Last year we flagged that inventory had grown sharply, while demand, especially demand for goods, is falling. In 2023, companies will need to decide how they want to handle that excess inventory, and we believe many will turn to aggressive discounting. Up next is China. We've talked a lot over the last few months about China's expected reopening, and we believe a V-shaped recovery in China's growth is now likely, given the sudden change in prior COVID zero policy. We expect a 5.4% GDP growth for China in 2023. Our fourth theme is ESG. We think that what we call ESG rate of change, i.e. companies that are leaders in improving environmental, social and governance metrics, will be a critical focus for investors looking to identify opportunities that can both generate alpha on the one hand and ESG impact on the other. Next, in Q4 last year, you may have heard us talk about Earthshots, which is our fifth theme. These are radical technological decarbonization accelerants or warming mitigants. Clean tech funding is one of the most resilient segments in venture, and breakthroughs are becoming more frequent. We're keeping a close eye on the key technologies that we think will hold the greatest decarbonization potential in 2023 and beyond. Sixth, we're in the upswing of unicorns, i.e. privately held startup companies with a valuation over $1 billion, needing to re raise capital to maintain operations and growth. In the absence of unicorn consolidation, we expect money to flow out of public equities to support or compensate for the weakness in private investments. This will be the year of the down round, in our view, where companies need to raise additional funds at lower valuations than prior rounds. But also we expect it to be a year of opportunity for crossover investors and a potential reopening of the IPO market. Next, I've already mentioned our China forecasts, but we are also in the early innings of the "India Decade", which is our seventh theme. India has the conditions in place for an economic boom fueled by offshoring, investment in manufacturing, the energy transition and the country's advanced digital infrastructure. This is an underappreciated multi-year theme, but importantly one that is gathering momentum right now. Our other regional theme to watch this year is Saudi Arabia, which is also undergoing an unprecedented transformation with sweeping social and economic reforms. With about $1 trillion in "gigaproject" commitments, and rapid demographic shifts, it's our eighth big theme. And one that we think could easily leave people behind given the blistering speed of change. Penultimately, with the emergence of ChatGPT, the future of work is set to be further disrupted. We believe that we are on a secular trajectory towards the workforce, particularly the younger Gen Z, entering what we call the "multi-earner era" - one where workers pursue multiple earning streams rather than a single job. There are a vast array of enabler stocks for this multi-year era, in our view.  And finally, last but not least, we believe obesity is the "new hypertension" and that investing in obesity medication is moving from a linear secular theme to an exponential one, with social media creating a virtuous feedback loop of education, word of mouth, and heightened demand for weight loss drugs. So that's it. Hopefully we've given you some thought provoking macro, micro, regional and ESG ideas for the year ahead. Thanks for listening. If you enjoy the show, please leave a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

One of the frequent questions regarding Emerging Markets is whether outperformance will hold for the short term or the long term. So what factors should investors consider when evaluating the cross asset performance of EM?----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 13th at 2 p.m. in London. A common question when talking about almost any market is whether the view holds for the short term or the long term. Call it a question of whether to "rent" versus "own". Is this a strategy that could work over the next six months or is it geared to the next six years? This question comes up most frequently when we discuss emerging market or EM assets. We like EM on a cross-asset basis. We think equities in EM outperform those in the U.S. We think EM currencies outperform the U.S. dollar and the British pound. And we think EM sovereign bonds perform well on an outright basis and also relative to U.S. high yield. Several factors underlie this positive view. First, as we've discussed in this program before, a number of key themes for 2023 look like the mirror image of 2022. Last year saw U.S. growth outperform China, inflation rise sharply and central banks hike aggressively, a combination that was pretty tough in emerging market assets. But this year we see growth in China accelerating while the U.S. slows, inflation falling and central banks pausing, a reversal that would seem much better for EM. And this is all happening at a time when EM assets still enjoy a valuation advantage. Emerging market equities, currencies and sovereign bonds all still trade at larger than average discounts to their U.S. peers. All of that supports the near-term case for outperformance in emerging markets, in our view. But what about the longer term story? Here we admit there are still some uncertainties. On one hand, there are some countries where there's a quite positive long run outlook in the eyes of my research colleagues. I'd highlight Mexico here, a country that we think could be a major long term beneficiary of U.S. companies looking to shorten supply chains and bring more production back from Asia. But there are also major long term uncertainties, especially related to earnings power. The case for EM equities is often based around the idea that you get the higher growth of the developing world at lower valuations, an attractive combination that offsets the higher political and economic volatility. But as my colleague Jonathan Garner, Head of Asia and Emerging Market Equity Strategy, has noted, earnings for the EM market have been surprisingly weak over the long run and are still at levels similar to 2010. Growth so far has been elusive. Uncertainty around that long term earnings power is one of several reasons that it may be too early to say that EM will be a multiyear outperformer. But for the time being, we think those longer term concerns will be secondary to near-term support and continue to expect cross-asset outperformance from EM assets this year. Thanks for listening. Subscribe to Thoughts on the market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

At this week’s North American Leaders Summit, the U.S., Canada and Mexico committed to boosting the semiconductor industry in another key step on the path towards a multipolar world.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Thursday, January 12th at 10 a.m. in New York. This week, the presidents of the United States, Canada and Mexico gathered for the North American Leaders Summit. For investors, the key result was a commitment by the countries to work together to boost the semiconductor industry in North America. While the practical details of this commitment will matter greatly, the agreement in principle underscores a few key themes for investors. The first is that the trend toward a multipolar world is ongoing, one where geopolitics increase commercial barriers and create the need for multiple supply chains, product standards and economic ecosystems. So countries and companies must rewire their own approach to production in order to cope. This semiconductor commitment is the result of a determination by the U.S. that it's in its own interest to develop a substantial and secure semiconductor industry in its own backyard, in order to mitigate supply chain risks to key industries like automobile production. In this way, the country's economy is less susceptible to overseas disruptions. And the U.S. was likely able to achieve this commitment with its neighbors by enacting the CHIPS+ legislation with bipartisan support. You may recall that legislation appropriated money to attract the construction of semiconductor facilities in the U.S. This brings us to our second point, which is that this commitment underscores the opportunity for Mexico to benefit from U.S. led nearshoring. As we've discussed on this podcast with our Mexico strategist, Nik Lippman, Mexico has a sizable manufacturing labor force and proximity to the U.S. For semiconductors, that means Mexico could potentially be a supplier or at least a supplier of the goods materials that go into fabrication. It's one of the key reasons that Nik has upgraded Mexico stocks to overweight. So in short, this meeting was another step on the path toward a multipolar world, a key trend we're tracking in 2023. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.

In 2022 it seemed like there was nowhere to hide from the negative returns in traditional investing. But if we look to quantitative strategies, we may find more flexibility for the year ahead.----- Transcript -----Vishy Tirupattur Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's head of fixed income research and director of Quantitative Research.Stephan Kessler And I'm Stephan Kessler, Morgan Stanley's global head of Quantitative Investment Strategies Research.Vishy Tirupattur And on this special episode of the podcast, we will discuss the return of quantitative investing. It's Wednesday, January 11th, at 10 a.m. in New York.Stephan Kessler And 3 p.m. in London.Vishy Tirupattur Stephan, 2022 was a pretty dismal year for traditional investment strategies across various asset classes. You know, equities, credit, government bonds—all of them had negative total returns for the year. And in fact, for traditional investment strategies, there really was nowhere to hide. That said, 2022 turned out to be a pretty decent year for systematic investing or factor investing or quantitative investing strategies. So can you start us off by giving us an overview of what systematic factor strategies are and how they performed in 2022 versus traditional investment strategies?Stephan Kessler Absolutely. So, if you look at quant strategies, or systematic strategies, key is 'systematic.' So we look at repetitive, persistent patterns in the markets which can be beneficial for investors. Usually they're data driven. So we look at data which can be price data, fundamental data like economic growth data and the like, which then gives us signals for our investment. Those strategies tend to have low long-term exposures to traditional markets such as equities and fixed income. So they work as diversifiers and the rationale for why they work comes from academic theory, by and large, where we look at risk premia, we look at structural or behavioral patterns that are well known in the academic world. So common strategies that investors apply can be carry investing, for example. So we benefit here from interest rate differentials where we borrow, for example, money in low yielding regions or currencies, and then we invest in high yielding currencies, clipping the difference in the interest rate between these regions. Value investing is another important style that investors implement, where they simply identify undervalued investments, undervalued assets by looking at price to book ratios, by looking at dividend yields, for example, to identify what appears to be cheap. Momentum investing is probably the third most important strategy here, which is where we benefit from the price trends in markets which we know to be persistent. So those are the, I think, the important styles—carry, value and momentum—but there are also more complex strategies where we model and identify very minute details in markets. We go really deep into the functionality of markets. Then the final point I would make is that these strategies tend to be long-short so they are not long biased as traditional investing is, but they can go really both directions in terms of their positioning.Vishy Tirupattur Investors often ask how quant strategies, that are typically predicated on historical data patterns, can handle volatile market environments with very few historical precedents. 2022 was anything but normal. Don't such market aberrations break quant strategies?Stephan Kessler That's a really good question. If you look at it from the higher level, it does seem like this was a unique market that actually should be challenging for systematic strategies which look at historical patterns. When you dig a little bit deeper, it becomes actually more nuanced. So the strong outperformance of quant in '22, we think is driven by the different catalysts that we saw in the markets. So for example, the tightening by central banks led to substantial and durable macro trends that can be captured by trend following. We saw a reemergence of interest rates across the globe through this monetary policy, which sparked the revival of carry investing. And then equity value investing reemerged as higher rates forced investors to focus more on fundamental valuations, and that led to an increase in efficiency of the value factor.Vishy Tirupattur Will any of the performance patterns that you saw in 2022 carry over into 2023? Or do you think the investment landscape for quant investors would be very different in this year?Stephan Kessler 2023 we think we'll look, of course, different from the past year. So, we'll move into an environment of low inflation where terminal rates are going to be reached by many central banks. And then equities will start the year in Q1 likely down to then end the year rather flat according to our equity strategists. Now, from a quant perspective, while this is different in terms of the actual dynamics, what remains is that we are likely to see

As 2023 begins, most market participants agree the first half of the year could be challenging. But when we dig into the details, that's where the agreement ends.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Tuesday, January 10th at 10 a.m. in New York. So let's get after it.To start the year, we return to a busy week of client meetings and calls. While our conversations ranged across a wide swath of topics, the most consistently asked question was, "if everybody has the same view, how can that be right?" The view I'm referring to is that most sell-side strategists and buy-side investors believe the first half of the year will be a challenging one, but the second half will be much better. Wrapped into this view is the notion that we will experience a mild recession starting in the first half. The Fed will cut rates in response and a new bull market will begin. Truth be told, this is generally our view too. So, how do we reconcile this dilemma of how the consensus can be right? We think the answer is that the consensus can be right directionally, but it will be wrong in the magnitude and rationale which may inhibit its ability to monetize the swings we envision. More importantly, our biggest issue with the consensus view is how nonchalant many investors seem to be about the risk of a recession. When we ask investors how low they think the S&P 500 will trade in a mild recession, most suggest 35-3600 will suffice, and the October lows will hold. One rationale for this more constructive view is that we are closer to a Fed pause, and that pivot will put a floor under stock valuations.The other reason we hear is that everyone is already bearish and expects a recession. Therefore, it must already be priced. We would caution against those conclusions as recessions are never priced until they arrive and we're not so sure the Fed is going to be coming to the rescue as fast as usual, given the inflation dynamics unique to this cycle.The other way we think the consensus is likely to be wrong is on earnings. With or without an economic recession, the earnings forecasts for 2023 remain materially too high in our view. Our base case forecast for 2023 S&P 500 earnings per share is $195, and this assumes no recession, while our bear case forecast of a recession leads to $180. This compares to the bottoms up consensus forecast of $230, which nearly every institutional investor agrees is too high. However, most are in the camp that the S&P 500 earnings per share won't be as bad as we think, with the average client around $210-$215. Coincidentally, this is in line with the consensus sell-side strategists' forecast of $210 as well. In summary, even if we don't experience an economic recession, investor expectations for earnings remain too high based on our forecasts and conversations with clients. This leaves equity prices unattractive at current levels.Our well-below-consensus earnings forecast is centered around a theme of negative operating leverage driven by falling inflation. One of the most consistent pieces of pushback we have received to our negative earnings outlook centers around the idea that higher inflation means higher nominal GDP and therefore revenue growth that can remain positive even in the event of a mild real GDP recession. Therefore, earnings should hold up better than usual. While we agree with the premise of this view that revenue growth can remain positive this year, even if we have a mild recession, it ignores the fact that margins are likely to materially disappoint. This is because the rate of change on cost inflation exceeds the rate of change on sales. Indeed, margins have started to fall and the consensus forecasts for fourth quarter results currently assume negative operating leverage. But we think this dynamic is likely to get much worse before it gets better.The bottom line, equity markets still appear to be overly focused on inflation and the Fed, as evidenced by the still meaningfully negative correlation between real yields and equity returns. Last week, we saw expectations improve slightly for inflation and the Fed's reaction to it. And stocks rallied sharply into the end of the week. We think this ignores the ramifications of falling prices on profit margins, which is likely to outweigh any benefit from increased Fed dovishness.In short, we think we're quickly approaching the point where bad news on growth is bad. And we see 3900 on the S&P 500 as a good level to be selling into again in front of what is likely to be another weak earnings season led by poor profitability and the broader introduction of 2023 guidance.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on th

With an eventful year for the oil market behind us, what are the factors that might influence the supply, demand, and ultimately the pricing of oil and gas in 2023?----- Transcript -----Welcome to Thoughts on the Market. I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist. Along with my colleagues, bringing you a variety of perspectives, today I'll discuss some of the key uncertainties that the global oil market will likely face in 2023. It's Monday, January 9th at 3 p.m. in London. Looking back, 2022 was an eventful year for the oil market. The post-COVID demand recovery of 2021 continued during the first half and by June demand was back to 2019 levels. For a brief period the demand recovery appeared complete. Over the same period non-OPEC supply growth mostly disappointed, OPEC's spare capacity declined and inventories drew. Which eventually meant that oil markets had to start searching for the price level where demand destruction kicked in. Eventually, this forced prices of key oil products such as gasoline and diesel, to record levels of around $180-$290 a barrel in June. Clearly, those prices did the trick. Together with new mobility restrictions in China, aggressive rate hikes by central banks and rising risk of recession, particularly in Europe, they effectively stalled the oil demand recovery. And by September, global oil demand was once again below September 2019 levels. By late 2022, brent prices that retraced much of their earlier gains and other indicators, such as time spreads and refining margins, had softened too. Now, looking into 2023 we don't see this changing soon. Counting barrels of supply and demand suggest that the first quarter will still be modestly oversupplied. Also, declining GDP expectations, falling PMIs and central bank tightening are still weighing heavily on the oil market today. Eventually, however, we see a more constructive outlook emerging, say from the spring onwards. First, we expect to see a recovery in aviation. Global jet fuel consumption is still well below 2019 levels, and we think that a substantial share of that demand will return this year. Another key development will be China's reopening. At the end of 2022 China's oil demand was still well below 2020 and 2021 levels, held back by lockdowns and mobility restrictions. We expect China's oil demand to start recovering after the first quarter of this year. Shifting over to Europe and the EU embargo on Russian oil, as of last November, the EU still imported 2.2 million barrels a day of Russian crude oil and oil products. Now, especially after the EU's embargo on the import of oil product kicks in, which will be on February 5th, Russia will need to find other buyers and the EU will need to find other suppliers for much of this oil. Now, some of this has already been happening, but the full rearrangement of oil flows around the world as a result of this issue will probably not be full, smooth, fast and without price impact. As a result, we expect that some Russian oil will be lost in the process and Russian oil production is likely to decline in coming months. In the U.S., capital discipline and supply chain bottlenecks have already held back the growth in U.S. shale production. However, well performance and drilling inventory depth are emerging additional concerns putting further downward pressure on the production outlook. Eventually, the slowdown in U.S. shale will put OPEC in the driver's seat of the oil market. Also last year saw an unprecedented release of oil from the U.S. Strategic Petroleum Reserve. But this source of supply is now ended and the U.S. Energy Department will likely start buying back some of this oil in coming months. Finally, investment in new oil and gas production is rebounding, but it comes from a very low base and the recovery has so far been modest. Much of it is simply to absorb cost inflation that has also happened in the industry. In other words, the industry isn't investing heavily in new oil production, which has implications for the longer term outlook for oil supply. Eventually, we think these factors will combine in a set of tailwinds for oil prices. If we are wrong on those, the market would be left with the status quo, which would be neutral. But we believe that these risks will eventually skew positively later in 2023. We expect the oil market to return to balance in the second quarter, and be undersupplied in the second half of this year. With a limited supply buffer only, we think brent will return to over $100 a barrel by the middle of the year. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

Discover what 2022, a historic year for markets, can teach investors as they navigate the new year.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 6th at 2 p.m. in London.For the year ahead, we think U.S. growth slows while China accelerates, inflation moderates and central banks pause their rate hikes while keeping policy restrictive enough to slow growth. We think that backdrop favors bonds over stocks, emerging over developed markets and international over U.S. equities.But there'll be plenty of time to discuss those views and more in the coming weeks. Today, I wanted to take a step back and talk a little about the year that was. 2022 was historic and within these unusual swings are some important lessons for the year ahead.First, for the avoidance of doubt, 2022 was not normal. It was likely the first year since at least the 1870s that both U.S. stocks and long-term bonds fell more than 10% in the same calendar year. We don't think that repeats and forecast small positive total returns for both U.S. stocks and bonds in the year ahead.Second, it was a year that challenged some conventional wisdom about what counts as a risky part of one's portfolio. So-called defensive stocks—those in consumer staples, health care and utilities—outperformed significantly, which isn't a surprise given the poor market environment. But other things were more unusual. Small cap stocks and value stocks, which are often seen as riskier, actually outperformed. Financial equities were the second-best performing sector in Europe, Japan and emerging markets despite being seen as a riskier sector. And both the stock market and currencies of Mexico and Brazil, markets that are seen as high beta, gained in dollar terms despite the historically difficult market environment.This is all a great reminder that the riskiness of an asset class is not set in stone. And it shows the importance of valuation. Small caps, value stocks and Mexico and Brazilian assets all entered 2022 with large historical valuation discounts, which may help explain why they were able to hold up so well. For this year, we think attractive relative valuation could mean international equities are actually less risky than U.S. equities, bucking some of the historical trends.Finally, 2022 was a great year for the so called 'momentum factor.' Factor investing is the idea that you favor a certain characteristic over and over. So, for example, always buying assets that are cheaper, the 'value factor,' buying assets that pay you more, the 'carry factor,' or always buying assets that are doing better, the 'momentum factor.'In 2022, buying what had been rising, both outright or relative to its peers, worked pretty well across assets despite the simplicity of this strategy. Our work has suggested that momentum has a lower return than these other factors but is often very helpful in more difficult market environments. It's a good reminder that it's not always best to be contrarian and sometimes going with the trend is a simple but effective strategy, especially in commodities and short-term interest rates.2022 is in the record books. It was an unusual year but one that still provides some useful and important lessons for the year that lies ahead.Happy New Year and thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us to review. We'd love to hear from you.

With the fight against inflation quieting down in many regions, Asia saw a relatively small step up in inflation. Will that leave 2023 open to the possibility of growth outperformance?----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing our 2023 outlook for Asia economics. It's Thursday, January 5th at 9 a.m. in Hong Kong. If 2022 was all about inflation, we believe 2023 will be about the aftermath of this battle with inflation. All eyes are now on how the world's largest economies will stack up after this battle with inflation. While Asia, along with the rest of the world, face multiple stagflationary shocks in 2022, we think that Asia weathered these shocks better. Indeed, we believe Asia will enter a rapid phase of disinflation and is well-positioned for growth outperformance in 2023. The step up in Asia's inflation was smaller compared to other regions. Furthermore, Asia's inflation had more of a cost-push element, meaning it was driven to a large extent by increases in cost of raw materials. And we believe Asia's inflation already peaked in third quarter of 2022. Asia's inflation should be rapidly returning towards central bank's comfort zone. We expect this to be the case for 90% of Asian economies by mid 2023. Cost-push factors are fading, resulting in lower food and energy inflation. Core good prices are descending rapidly, given the deflation in goods demand. Moreover, labor markets were not that tight in Asia, and wage growth has remained below its pre-COVID rates. Because of this backdrop, we've argued that central banks in Asia do not need to take policy rates deeper into restrictive territory. In fact, all of the central banks in the region will likely stop tightening in first quarter of 2023. This pause in Asia's rate hiking cycle, coupled with an easing in U.S. 10 year bond yields and with the peak of USD behind us, should lead to easier financial conditions in 2023. While weak external demand will remain a drag at least through the first half of 2023, Asia's domestic demand is supported by three factors. First, the easing of financial conditions will lift the private sector sentiment. Second, we are witnessing a strong uplift in large economies like India and Indonesia, supported by healthy balance sheets. Finally, China's reopening will lift consumption growth and have a positive effect on economies in the region, principally via the trade channel, helping Asian economies to get onto the path of growth outperformance. We expect Asia's growth to improve from a trough of 2.8% in first quarter of 2023, to 4.9% in second half of 2023, while DM growth will slow from 0.9% in first quarter of 2023 to 0.3% in second half of 23. Growth differentials will likely swing back in Asia's favor, rising back towards the levels last seen in 2017 and 2018. There are, of course, risks to our optimistic outlook for Asia. If U.S. inflation stays elevated for longer, this would lead to more tightening by the Fed than is expected and could drive renewed strength in the USD. This in turn would prolong the rate hike cycle in Asia, keeping financial conditions tight and exert downward pressures on growth. A delayed reopening in China could impact China's growth trajectory with adverse spillover implications for the rest of the region. Thanks for listening. If you enjoyed the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.

The House of Representatives continues its struggle to appoint a new Republican Speaker. What should investors consider as this discord sets the legislative tone for the year?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Global Thematic and Public Policy Research for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between public policy and financial markets. It's Wednesday, January 4th, at 10 a.m. in New York. The focus in D.C. this week has been on choosing the new speaker of the House of Representatives. Choosing this leader, who largely sets the House's voting and workflow agenda, is a necessary first step to opening a new Congress following an election. This process is usually uneventful, with the party in the majority typically having decided who they'll support long before any formal vote. But this week, something happened, which hasn't in 100 years. The House failed to choose a speaker on the first ballot. As of this recording, we're now three ballots in and the Republican majority has yet to agree on its choice. So is this just more DC noise? Or do investors need to be concerned? While it's too early to tell, and there don't appear to be any imminent risks, we think investors should at least take it seriously. The House of Representatives will eventually find a way to choose a speaker, but the Republicans' rare difficulty in doing so suggests it's worth tracking governance risk to the U.S. economic outlook that could manifest later in the year. To understand this, we must consider why Republicans have had difficulty choosing a speaker. In short, there's plenty of intraparty disagreement on policy priorities and governance style. And with a thin majority, that means small groups of Republican House members can create the kind of gridlock we're seeing in the speaker's race. This dynamic certainly isn't new, but the speaker's situation suggests it may be worse than in recent years. So whoever does become the next speaker of the House could have, even by recent standards, a higher degree of difficulty keeping their own position and holding the Republican coalition together. That's a tricky dynamic when it comes to negotiating on politically complex but economically impactful issues, such as raising the debt ceiling and keeping the government funded, two votes that will likely take place after the summer. On both counts, some conservatives have in the past been willing to say they will vote against those actions and in some cases have actually followed through. But aside from the debt ceiling situation in 2011, these votes have largely been protests and did not result in key policy changes. That's still the most likely outcome this year. And as listeners of this podcast are aware, we've typically dismissed debt ceiling and shutdown risks as noise that's not worth much investor attention. But we're not ready to say that today. Because while policymakers are likely to find a path to raising the debt ceiling, this negotiation could look and feel a lot more like the one in 2011 where party disagreements appeared intractable, even if they ultimately were not. That could remind investors that the compromise involved contractionary fiscal policy, which could weigh on markets if the U.S. economy is also slowing considerably per our expectations. This is a risk both our Chief Global Economist, Seth Carpenter, and I flagged in the run up to the recent U.S. midterm election. Of course, it's only January, and 6 to 9 months is a lifetime in politics. So, we don't think there's anything yet for investors to do but monitor this dynamic carefully. We'll be doing the same and we'll keep you in the loop. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague, or leave us a review on Apple Podcasts. It helps more people find the show.