Thoughts on the Market

As investors face the multitude of risks ahead, one may need to think like the Tiger and use the rotation towards value stocks, and away from growth, to leap over higher hurdle rates this year. ----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about Asia and emerging market equities in the year ahead. It's Monday, February the 14th at 8:30 p.m. in Hong Kong.Welcome to the Year of the Tiger from the Morgan Stanley team in Asia. Ferocious, brave, and intelligent, the tiger inspires us to navigate the multitude of risks which confront investors today. For us in Asia, we're at first sight on the sidelines of the action as expectations build for a sea-change this year in monetary policy in the US and Europe.Indeed, we have a degree of sympathy with the argument that the different phase of the monetary and fiscal cycle in China, in essence a moderate easing, is a key reason to be more constructive on Asian markets performance this year in both absolute and relative terms.However, divergent policy cycles are only part of the story. North Asia has already benefited substantially from the major shift towards good spending and away from services, which has been such a unique feature of the COVID driven recession and recovery. Now, as that starts to reverse, given the reopening trend in the US and Europe, we may see earnings growth in markets like Korea and Taiwan slow. Moreover, significant challenges in relation to COVID management still beset the region, most notably in Hong Kong, which is experiencing its largest surge in cases since the pandemic began.A key call that Morgan Stanley's equity strategy team made three months ago, in our year ahead outlook, was that investors on a worldwide basis should rotate away from growth stocks. That is, stocks with high expected earnings growth and high valuations towards value stocks. That is those with lower valuations, more dividend yield support, and lower anticipated earnings growth, not least due to the fact that many businesses in the value style category tend to be more established than growth stocks.This rotation has indeed taken place, as evidenced not just by Nasdaq's underperformance in the US, but also the underperformance of growth stocks in Asia and emerging markets. This has been reflected in indices like Kosdaq in Korea or the TSE Mothers Index in Japan. In fact, in Japan banks and insurers, stocks which investors have not focused on for a long time, are leading in performance in 2022. Whilst in China, bank stocks have been outperforming internet stocks for some time now.For those of us who worked through the 1999 to 2002 cycle in global equities, things seem very familiar. History rhymes rather than repeats, but the catalyst for growth stock underperformance then, as now, was a sudden repricing of interest rate hike expectations with a shift higher in nominal and real interest rates. That higher hurdle rate depresses valuations for equities generally, but particularly for higher multiple growth stocks, further motivation for the rotation towards value stocks.So. investors may need to start thinking like the tiger in order to leap over that hurdle and land safely on the other side.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.

Headlines today are focused on US Consumer Price Inflation rising 7.5% versus 1 year ago. The question on the minds of consumers and investors alike is, where will it go from here?----- 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 11th at 2 p.m. in London.This week for the ninth month in the last 10, U.S. consumer price inflation was higher than expected, rising 7.5% Versus a year ago. Investors are currently having a very lively discussion around where inflation is headed, but also how much it matters. And I wanted to share a few of our thoughts.One important thing about these rising prices is they aren't all rising for the same reason. COVID related disruptions are still impacting the production of everything from meat to automobiles. And say, with fewer new cars being built that means the cost of used cars has risen almost 50%. Now cars aren't a large share of the so-called inflation basket, the collection of goods and services that is used to determine how much overall prices are rising or falling. But if a small share of something rises 50%, the overall number can still rise quite a bit.Then there are rising prices that we see today, but where the story has been building for some time. The assumed cost of shelter, for example, should be linked to the price of housing. But due to how this data is measured, there can be some pretty significant lags.Consider the following. From the start of 2017, so about five years ago, U.S. home prices have risen 50%. But the assumed rise in the cost of shelter, that goes into the inflation calculation, suggests that the cost of shelter has risen just 16% over that same period. As this gap closes and shelter costs catch up to where home prices already are, that will get reported as a lot of additional inflation, even if home prices have stopped rising.Another part of this story is the narrative and the timing of it. Per a quick check of the headlines this morning, Thursday’s inflation data was the top story for The Wall Street Journal and The New York Times.Yet, based on Morgan Stanley's current forecasts, U.S. inflation is actually peaking right about now. We think the direction of data matters enormously in terms of how it's interpreted because there's a very human tendency to extrapolate whichever direction it happens to be heading. Today, the rate of inflation's been heading up, creating fears that it will continue to move higher. But if we're right that inflation peaks in the next month or two, April or May could feel very different.Unfortunately, we're not quite there yet. The inflation rate is still rising, creating uncertainty about what central banks will do and how they'll respond. That uncertainty is driving volatility and should warrant lower prices for things that are very central bank sensitive. We think yields for government bonds in the U.S., the U.K., and the Eurozone will continue to move higher, and that spreads on mortgages, sovereign bonds, and corporates can move modestly wider.On the other hand, we feel better about assets that are less sensitive to this inflation uncertainty, including the less expensive stock markets outside the U.S. Stocks in the United Kingdom which my colleague Graham Secker, Morgan Stanley's Chief European Equity Strategist, discussed on this program recently are one such example.Finally, keep in mind that the inflation debate could feel very different in just a month or two. If the inflation data peaks soon, as our economists expect, it could provide some relief as we look ahead to April or May.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.

Original Release on January 25th, 2022: With inflation on the minds of consumers and the Fed reacting with a sharp turn towards tightening, 2022 may be a year for investors to focus on incorporating tax-efficient strategies into their portfolios. Morgan Stanley Wealth Management’s Chief Investment Officer Lisa Shalett and Chief Cross-Asset Strategist Andrew Sheets 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 today on the podcast, we'll be discussing the importance of tax efficiency as a pillar of portfolio construction. It's Tuesday, January 25th at three p.m. in London.Lisa Shalett And it's 10:00 a.m. here in New York.Andrew Sheets Lisa, welcome back to the podcast! Now, as members of Morgan Stanley Wealth Management's Global Investment Committee, we both agree that the current portfolio construction backdrop is increasingly complicated and constrained. But tax considerations are also important, and this is something you and your team have written a lot on recently. So I'd really like to talk to you about both of these issues, both the challenges of portfolio construction and some of the unique considerations around tax that can really make a difference to the bottom line of investment returns. So Lisa, let's start with that current environment. Can you highlight why we believe that standard stock bond portfolios face a number of challenges going forward?Lisa Shalett We've been through an extraordinary period over the last 13 years where both stocks and bonds have benefited profoundly from Federal Reserve policy, just to put it bluntly, and, you know, the direction of overall interest rates. And so, our observation has been that, you know, over the last 13 years, U.S. stocks have compounded at close to 15% per year, U.S. bonds have compounded at 9% per year. Both of those are well above long run averages. And so we're now at a point where both stocks and bonds are quite expensive. They are both correlated to each other, and they are both correlated to a large extent with Federal Reserve policy. And as we know, Federal Reserve policy by dint of what appears to be inflation that is not as transitory as the Fed originally thought is causing the Fed to have to accelerate their shift in policy. And I think, as we noted over the last three to six weeks, you know, the Fed's position has gone from, you know, we're going to taper and have three hikes to we're going to taper be done by March. We may have as many as four or five hikes and we're going to consider a balance sheet runoff. That's an awful lot for both stocks and bonds to digest at the same time, especially when they're correlated with one another.Andrew Sheets And Lisa, you know, if I can just dive into this a little bit more, how do you think about portfolio diversification in that environment you just described, where both stocks and bonds seem increasingly linked to a single common factor, this this direction of Federal Reserve policy?Lisa Shalett One of the things that we've been emphasizing is to take a step back and to recognize that diversification can happen beyond the simple passive betas of stocks and bonds, which we would, you know, typically represent by, you know, exposures to things like the S&P 500 or a Barclays aggregate. And so what we're saying is, within stocks, you've got to really make an effort to move away from the indexes to higher active managers who tend to take a diversified approach by sector, by style, by market cap. And within fixed income, you know, we're encouraging, clients to hire what we've described as non-core managers. These are managers who may have the ability to navigate the yield curve and navigate the credit environment by using, perhaps what are nontraditional type products. They may employ strategies that include things like preferred shares or covered call strategies, or own asset backed securities. These are all more esoteric instruments that that hiring a manager can give our clients sources of income. And last, you know, we're obviously thinking about generating income and diversification using real assets and alternatives as well.Andrew Sheets And so, Lisa, one other thing you know, related to that portfolio construction challenge, I also just want to ask you about was how you think about inflation protection. I mean, obviously, I think a lot of investors are trying to achieve the highest return relative to the overall level of prices relative to inflation. You know, how do you think from a portfolio context, investors can try to add some inflation protection here in a smart, you know, intelligent way?Lisa Shalett So you know what we've tried to say is let's take a step back and think about, you know, our forecast for, you know, whether inflation is going to accelerate from here o

Many investors are asking when Congress will withdraw its fiscal policy support. Our answer? It already has, and 2022 could be a year where fiscal policy becomes a non-factor in the economic outlook.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas as Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, February 9th at 10 a.m. in New York.As the Fed keeps signaling its intent to withdraw its extraordinary monetary support for the economy, a common question we're hearing is when will Congress do the same with fiscal policy support? Our answer is simple: it already has.Now, we're usually getting this question from investors concerned that COVID relief aid is continuing to create inflation pressure in the economy. But the last tranche of aid was approved over a year ago, and direct aid to support households from that program have largely expired, including the child tax credit, supplemental unemployment benefits, and renter and mortgage protections.But what about all those infrastructure and social spending plans President Biden proposed? Even here there's no sizable fiscal expansion in sight. The bipartisan infrastructure framework was mostly offset by new revenues. And on the Build Back Better plan, Senator Joe Manchin appears to have made deficit neutrality a condition for his support for it. So any legislative comeback for that plan likely won't result in more fiscal support for the economy.For investors, this is a throwback to periods where fiscal policy was an afterthought. In many recent years, like 2018, 2020 and 2021, fiscal policy was a key variable to the U.S. economic outlook. This year, it looks like a non-factor. That syncs with our framework for forecasting U.S. fiscal policy outcomes, which currently points to the U.S. having moved from a phase of proactive fiscal expansion, to one of stability. That's because legislative decisions by Congress that expand the deficit are typically a function of motive and opportunity. The motive is strong when there's perceived political value to the short-term economic boost that comes with the deficit expansion. The opportunity is there when one party controls Congress and the White House. Both these conditions were met after the 2020 election, resulting in another round of substantial COVID aid. But with inflation on the rise and issue polls showing it's beginning to bother voters, that motive is waning. As a result, expect U.S. fiscal policy to remain neutral until an election or an economic downturn opens a path for it.But while fiscal policy might not be a macro factor, it could still drive some sector outcomes. For example, a deficit neutral build back better plan could still feature a corporate minimum tax, creating headwinds for financials and telecom. But it could also include substantial spending on carbon reduction, potentially directing a lot of fresh capital to the clean tech sector. And of course, it's important to remember 2022 is an election year, so expect the fiscal conversation to evolve.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.

Despite having been one of the worst performing stock markets over the last 5 years, the UK is seeing a dramatic turnaround reflected in the FTSE100 index. Investors may want to take a closer look.----- 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 our positive view on U.K. equities and why we think the FTSE 100 offers a compelling opportunity here. It's Tuesday, February the 8th at 3 p.m. in London.Having been one of the worst performing stock markets over the last five years, the UK has seen a dramatic turnaround in 2022, with the headline FTSE 100 index, which is the UK equivalent of the S&P 500, outperforming the S&P by around 8% or so, so far, and posting the second-best return of any major global stock market after the Hang Seng in Hong Kong. Looking forward, we think the reversal of fortunes for UK equities can continue for three reasons.First, we think the Footsie 100 index offers a good blend of offense and defense. On the latter, we note the defensive sectors account for 37% of UK market capitalization, which is higher than any other major country or region. Reflecting this, the UK index has outperformed the wider European market two thirds of the time during periods when global equities are falling.When it comes to offense, we know that the UK market is a key relative beneficiary of rising real bond yields, to the extent that a move up in US real yields to our target of minus 10 basis points by year end would imply UK stocks outperforming the rest of the European market by as much as 12% this year. The reason behind the UK's positive correlation to real yields is again down to its sector mix. As well as being quite defensive, the index also has a significant weight in value stocks, such as commodities and financials. These are sectors that tend to perform best when real yields are rising, and investors are becoming more valuation sensitive.While the UK has always had something of a value bias, this relationship is currently even stronger than normal and this leads me to the second driver behind our positive view on the FTSE 100 here, namely that the index is cheap. So cheap, in fact, that you have to go back to the 1970s to find the last time UK equities were this undervalued versus their global peers. To provide some context to this narrative, the FTSE 100 is on a 12-month forward price to earnings ratio of 12.5 versus Europe on 15 times, and the S&P closer to 20 times. As well as a low PE, the UK also offers a healthy dividend yield of 3.6%, which is around twice that on offer from global indices.The third and final support to our positive view on UK equities is that consensus earnings expectations are very low, thereby creating a backdrop for subsequent upgrades that should support price outperformance. For example, consensus forecasts less than 3% earnings growth over each of the next two years, which represents the lowest growth forecast in over 30 years. We think this is too pessimistic and note the consensus expectations for the equivalent Eurozone index are much closer to normal at around 8 percent. The most likely source of upgrade risk around UK earnings comes from our positive view on the oil price, given the energy stocks accounted for 25% of all UK profits last year. With our oil team expecting the Brant oil price to rise to $100 later this year, we see scope for material profit upgrades for individual oil stocks and the broader FTSE 100 index too.One last point a positive view on the UK is primarily focused on the headline Large Cap FTSE 100 index. We are less constructive on UK mid-caps, as this part of the market is more expensive and hence gets less of a benefit from rising real yields. The more domestic nature of the mid-cap index also means it's more exposed to the growing pressure on UK households from rising energy bills, food prices, and tax increases. In contrast, the FTSE 100 is a very international index, with around 70% of revenues coming from outside the UK. This makes it less sensitive to domestic economic matters and also a beneficiary if we see any renewed weakness in the sterling currency. To conclude, we think international investors should take a closer look at the UK as we think there's a good chance it ends up being one of the best performing global stock markets in 2022.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 head towards the final weeks of winter, we are predicting a period of continued slow growth. As evidence we look not to our shadow but at earnings estimates and inventories.----- 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 colleague bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, February 7th at 11:30 a.m. in New York. So let's get after it.In the United States, February 2nd is known as Groundhog Day. A 135-year-old tradition of taking a groundhog out of his cage to determine if he can see his shadow. In short, a sunny February 2nd means six more weeks of winter, while a cloudy day suggests an early spring. Well, last week the most famous groundhog, who lives in Pennsylvania, saw his shadow informing us to expect more cold weather for six more weeks. While this tradition lives on, its track record is pretty spotty with a 50% hit rate. Flipping a coin sounds a lot easier. However, it does jive with our market forecast for at least six more weeks of winter, and ice, as growth slows further into the spring. Signs of weakness are starting to appear, and we think they go beyond Omicron. While we remain optimistic that this could be the final major wave of the pandemic, we're not so sure growth will rebound and accelerate as many others are suggesting.First, fourth quarter earnings beat rates are back to 5%, which is the long-term average. However, this is well below the beat rates of 15-20% observed over the past 18 months, a period of over earning in our view. The key question now is whether we are going to return to normal, or will we experience a period of under earning first, or payback? We've long held the view that payback was coming in the first half of 2022 as the extraordinary fiscal stimulus faded, monetary policy tightened, and supply caught up with demand in many end markets. Over the past few weeks several leading companies that weren't supposed to see this payback have disappointed with weaker than expected guidance on earnings. These stocks sold off sharply, and we think there are likely more disappointments to come as consumption falls short of expectations. Consumer confidence remains very soft due to higher prices, with our recent proprietary surveys suggesting consumers are expecting to spend more on staples categories over the next six months, versus the last six months. Spending on durables, consumer electronics and travel/leisure is expected to decline for lower income cohorts in particular.Second, inventories are now building fast and driving strong economic growth. However, the timing of this couldn't be worse if demand is fading more than expected. As noted in prior research, we think it could also reveal the high amounts of double ordering across many different industries. If that's correct, we are likely to see order cancelations, and that will only exacerbate the already weakening demand. In short, this supports a period of under-earning by companies as a mirror image to the past 18 months when inventories were lean and pricing power was rampant.Of course, the good news is that this likely means inflation pressures will ebb as companies lose pricing power. Eventually, this will lead to a more sustainable situation for the consumer and the economy. However, we think this could take several quarters before it's finally reflected in either earnings growth forecasts, valuations, or both. What this means for the broader market is probably six more weeks of downward bias. We continue to target sub-4000 on the S&P 500 before we would get more interested in trying to call an end to this ongoing correction. In the meantime, favor a defensive positioning. We've taken a more defensive posture in our recommendation since publishing our year ahead outlook in mid-November. Since then, it's paid off, although it hasn't been consistent. With last week's modest rally in cyclicals relative to defensives, we think it's a good time to fade the former and by the latter, since we still feel confident in our forecast for slowing growth even if the groundhog's track record isn't great.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.

For only the second time in the last decade, commodities outperformed equities in 2021. Looking ahead at 2022, what challenges and opportunities are on the horizon for this asset class?----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Morgan Stanley's Chief Cross Asset. Strategist.Martijn Rats And I'm Martijn Rats, Morgan Stanley's Global Commodity Strategist.Andrew Sheets And today in the podcast we'll be talking about tailwinds driving commodities broadly, as well as the path ahead for global energy markets. It's Friday, February 4th at 3p.m. in London. Andrew Sheets So, Martijn, there were a number of reasons why I wanted to talk to you today, but one of them was that, for only the second time in the last decade, commodities outperformed equities in 2021. There are a number of drivers behind this, and you and your team have done some good work recently talking about those drivers and how they might continue. But one of them has certainly been the focus on inflation, which has been a major investment topic at the end of last year and continues to be a major topic into this year. Why are commodities and the inflation debate so interlinked and why do you think they're important for commodity performance?Martijn Rats Well, look, commodities tend to maintain their value in real terms. So when there is broad inflation, the cost of producing commodities tends to go up. And when that happens, then the price of commodities tends to follow that. So at the same time, if you have a rising inflation, then also ends up in having an impact on interest rates. Interest rates start to rise. That tends to be a headwind for a lot of financial assets. So when inflation expectations all of a sudden pick up, then then all of a sudden it weighs on the valuation of an awful lot of other things, whilst actually commodities are often somewhat insulated of that. There aren't that many sectors that that really benefit from inflation. So all of a sudden then from an investment perspective, investment demand for commodities goes up. The allocation to commodities is still small, and when you put those things together, that explains why in the past and again over the last 12, 18 months, commodities really come into their own in these periods where inflation expectations are picking up and are high, commodities tend to do well in those environments.Andrew Sheets So another thing about commodities is that you can't ignore is that this is a really diverse set of things. You know, we're talking about everything from, you know, wheat, to coffee, to aluminum, to crude oil. So it's hard to generalize what's driving commodities as a whole, but something I think is quite interesting in your research is that one theme that actually strikes out across a lot of different commodities from aluminum to oil, is the energy transition, which is affecting both demand for certain commodities and the supply of certain commodities. Could you go into that in a little bit more detail how you see the energy transition impacting this space? You know, really over the next decade?Martijn Rats Yeah, it broadly splits in two and there are a range of commodities for which the energy transition is basically demand positive. So if you look at a lot of renewable projects, you know, wind power or solar power or hydrogen projects, electric vehicles, all of those types of assets require tremendous demand amounts of, basically of metals, copper, lithium, cobalt, nickel, aluminum. In those areas, it simply demands positive. But then there are other areas where the energy transition creates a lot of uncertainty about the long-term outlook for demand. This is particularly true, of course, for the fossil fuels, for oil and gas. And what is currently going on is that the energy transition is starting to become such a red flag not to invest in new productive capacity in those areas, that it's that it's already weighing on capex, and that there is an element of it constraining the supply of those fossil fuels even before demand is materially impacted. And we're seeing that at play at the moment. Oil and gas demand continues to recover quite strongly coming out of COVID, and there are actually very little signs that demand for those fossil fuels is rolling over anytime soon. But the energy transition makes the demand outlook over the long run into the 2030s very uncertain. And the way that we read the market at the moment is that the demand uncertainty is already impacting investment now. If you don't invest for the 2030s, there's a certain amount of oil and gas you also don't have over the next couple of years. So whether it's through the supply side or through the demand side, our conclusion would be that on the whole the energy transition contributes to the tightness of commodity markets in a relatively broad sense.Andrew Sheets So Martijn, drilling down a little bit further into the oil story. You know, you and your team have identif

Yields on Treasury Inflation-Protected Securities, or TIPS, are set to rise but, beyond inflation, what other factors will drive moves in real yields for these bonds in the coming year?----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, February 3rd at noon in New York. Last week, I talked about our expectation for the yields on Treasury Inflation-Protected Securities to keep rising. Those bonds are known as TIPS, and their yields are called real yields. Today, I want to tell you about what I think moves real yields up and down, and how the current macro environment influences our view on their next move. First, let's suppose demand for TIPS increases because investors think inflation is going to rise. If nothing else changes in the market, then TIPS prices will rise and the real yields they offer will fall. But, more often than not, something else changes. For example, the monetary policies of the Federal Reserve. An important part of the Fed's mandate is to stabilize prices. The Fed has defined this to be an average inflation rate of 2% over time. So, when inflation is above 2% and on the rise, like today, the Fed's approach to monetary policy becomes more hawkish. That means the Fed is looking to tighten monetary conditions and, more broadly, financial conditions. This tends to put upward pressure on real yields. So, even if inflation is high and rising, the effect of a hawkish Fed tends to dominate. But what if inflation is rising from a rate below 2%? In this case, the Fed might favor a more dovish policy stance because it wants to encourage inflation to return to its goal from below. Therefore, we would expect downward pressure on real yields. Another important factor driving inflation is aggregate demand in the economy. When investors expect demand to strengthen, that puts upward pressure on real yields. Said differently, when economic activity accelerates and real GDP is set to grow more quickly, real yields tend to rise. The opposite also holds true. If investors expect a deceleration in economic activity or, in the worst case, a recession, then real yields tend to fall. But what do these relationships mean for the direction of real yields in 2022? Bottom line, our economists expect the Fed to be more hawkish this year, tightening monetary policy in light of improved economic growth. Both of these factors should push real yields higher, even as inflation eventually cools later this year. 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.

The Federal Reserve continues to face a host of uncertainties, leading to volatility in the Treasuries market. This trend may lead some investors to reconsider the municipal bond market.----- Transcript -----Welcome the Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, February 2nd at 10 a.m. in New York. A couple weeks back, we focused on the tough job ahead for the Federal Reserve. It's grappling with an uncertain inflation outlook driven by unprecedented circumstances, including the trajectory of the pandemic, and the still unanswered questions about whether supply chain bottlenecks and swelling demand by U.S. consumers for goods over services have become a persistent economic challenge. Against that backdrop, it's understandable that keeping open the possibility of continued revisions to monetary policy is part of the Fed's strategy. Not surprisingly, that uncertainty has translated to volatility in the Treasury market and, as expected, some fresh opportunity for bond investors.For that, we looked in the market for municipal bonds, which are issued by state and local governments, as well as nonprofits. Credit quality is good for munis as the combination of substantial COVID aid to municipal entities and a strong economic recovery have likely locked in credit stability for 2022. But until recently, the price of munis was quite rich, in part reflecting this credit outlook, an expectation of higher taxes that would improve the benefit of munis tax exempt coupon, and a recent track record of low market volatility. But the bond market's reaction to the Fed undermined that last pillar, resulting in muni mutual fund outflows and, as a result, a move lower in relative prices for muni versus other types of bonds.While this adjustment in valuations doesn't exactly make munis cheap, for individuals in higher tax brackets, they're now looking more reasonably priced. And, as a general rule of thumb, when the fundamentals of an investment remain good, but prices adjust for purely technical reasons, that's a good signal to pay attention.So what does this mean for investors? Well, that fed driven volatility isn't going away, so munis could certainly still underperform some more from here. But for a certain type of investor, we wouldn't let the perfect be the enemy of the good. If you're in a higher tax bracket and need to replenish the fixed income portion of your portfolio, it could be time to curb your caution and start adding back some muni exposure.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.

The European Central Bank has indicated it would not raise rates this year, but markets are not fully convinced as shifts in inflation, gas prices and labor could force the ECB to reconsider.----- Transcript -----Welcome to Thoughts on the Market. I am Reza Moghadam, Morgan Stanley's chief economic adviser. Along with my colleagues, we bring you a variety of market perspectives. Today I'll be talking about the European Central Bank and whether it is likely to follow the Federal Reserve and the Bank of England in raising interest rates this year. It is Tuesday, February 1st at 2:00 p.m. in London. The European Central Bank, or the ECB, has long said it would not raise interest rates until it has concluded its bond purchase program. Since the ECB only recently announced that its taper would take at least till the end of this year to complete, this in theory rules out rate increases in 2022. The ECB president, Madame Lagarde, has reiterated that rate increases this year are "highly unlikely." However, the market is not fully convinced and is pricing some modest rate hikes. Many investors are also concerned that inflation could prove higher and more persistent than the ECB is projecting and could force it to follow the Fed and the Bank of England in tightening policy. We should start by recognizing that euro area inflation is nowhere near as high as in the United States, and expectations of longer-term inflation are below 2% - unlike in the US. Labor market conditions are easier, with low and stable wage growth. But even if the case for tightening is not as clear cut, this does not preclude a preemptive move by the ECB. Whether it does so will hinge on the continued viability of the ECB's inflation projections, which see inflation falling below its 2% target by the end of the year. It is too early to conclude that this inflation path has become too optimistic. Certainly, the second-round effects of recent high inflation outcomes - on wages and long-term inflation expectations - has so far been moderate. But this could change, and we would keep an eye on three triggers that might force a reconsideration. First, long-term inflation expectations. If perceptions start to drift up in the face of chronic supply shortages and higher gas prices, the process risks becoming a self-fulfilling prophecy, and un-anchoring inflation expectations. The ECB will want to nip this in the bud. Second, gas prices have jumped in the face of supply shortages and geopolitical tensions in Ukraine. Normally, the ECB looks through energy prices - not only because they are usually temporary, but also because, even when permanent, they imply a higher price level - not permanently higher inflation. But evidence of energy prices finding their way into long term inflation expectations could force action. Third, the current benign labor market situation could tighten. In that case, the ECB would want to react before the process goes too far. So if the ECB decides to tighten policy, what would that look like, and when could we expect it? A faster taper is the most likely vehicle for tightening monetary policy. Still, if inflation proves more resilient than currently projected, rate hikes while tapering cannot be definitively ruled out. We see limited risk of a policy shift at the ECB meeting later this week. There could be some action in March, but we expect this to be more likely in June, when there will be a fresh forecast and some hard data to base decisions on. So stay tuned. Thank you for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on Apple Podcasts. It helps more people find the show.

Investing strategies can be categorized into two broad categories: subjective and systematic. While some prefer one over the other, the best outcomes are realized when they are used 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 Monday, January 31st at 2:00 p.m. in London.There are as many different approaches to investing as there are investors. These can generally be divided into two camps. In one, which I'll call ‘subjective,’ the investor ultimately uses their own judgment and expertise to decide what inputs to look at, and what those inputs mean.Reasonable people often disagree, what variables matter and what they're telling us, which is why at this very moment you can find plenty of very smart, very experienced investors in complete disagreement over practically any investment debate you can think of.A lot of the research that myself and my colleagues at Morgan Stanley do fall into this more subjective camp. We're constantly in the process of trying to decide which variables matter and what we think these mean. But there's another approach which I'll call ‘systematic.’ Systematic investing is about writing down very strict rules and then following them over and over again, no matter what, with no leeway. Think of it a bit like computer code, if A happens - I will do B.The advantage of this systematic approach is that it isn't swayed by fear, or greed, or any other weaknesses in human psychology. The drawbacks are that very strict rules may not be flexible enough to adjust for genuine changes in the economy, in markets, or large, unforeseen shocks like a global pandemic. Think about it this way: Autopilot has been a great technological innovation in commercial aviation, but we all still feel much better knowing that there is a human at the controls that can take over if needed.I mention all this because alongside our normal subjective research, we also run a systematic approach called our Cross Assets Systematic Trading Strategy, or CAST. CAST looks at what data has historically been most meaningful to market returns, and then makes rule-based recommendations on where that data sits today.For example, if the key to investing in commodities historically has been favoring those with lower valuations, higher yields, and stronger recent price performance, CAST will look at current commodities and favor those with lower valuations, higher yields, and stronger recent price performance. And it will dislike commodities with the opposite characteristics. CAST then applies this thinking across lots of different asset classes and lots of different characteristics of those asset classes. It looks at equities, currencies, interest rates, credit and, of course, commodities.At the moment there are a number of areas where our systematic approach CAST and are more subjective strategy work, are in agreement. Both approaches see US assets underperforming those in the rest of the world. Both expect European stocks to outperform European bonds to a large degree. Both see higher energy prices, and both see underperformance in mortgages and investment grade credit spreads.When thinking about systematic versus subjective investment strategy, there's no right answer. But like our pilot analogy, we think things can work best when human and automated approaches can complement each other and work with each other.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.

Consumer prices reached an all-time high this past December, and a new year brings new challenges across inflation, wage growth and interest rates.----- Transcript -----Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research. Sarah Wolfe And I'm Sarah Wolfe, also on Morgan Stanley's U.S. Economics team. Ellen Zentner And on this episode of the podcast, we'll be talking about the outlook for consumer spending in the face of inflation, Omicron, rising interest rates and other headwinds. It's Friday, January 28th at 10:00 a.m. in New York. Ellen Zentner So Sarah, as most listeners have observed since the Fall, inflation is on everyone's mind, with consumer prices reaching a 39-year high in December, and we're forecasting inflation to recede throughout this year from about 7% now down to 2.9% by the fourth quarter. But let's talk about right now. Ellen Zentner So, you've got your finger on the pulse of the consumer. You're a consumer specialist on the team. And so, I want to ask, how quickly have consumers adjusted their spending over the past few months because of inflation? What evidence have we seen? Sarah Wolfe The consumer buying power has been very resilient in the face of high inflation. This week we got the fourth quarter GDP data and we saw the real PCE expanded by 3.3%. So that is another very strong quarter for consumer spending. And that brings spending to nearly 8% year over year in 2021, so very elevated. However, we are beginning to see that consumers may be reaching the upper echelon of their price tolerance in December. We got the retail sales report a couple of weeks ago for December, and we saw a very large contraction in consumer spending declined by more than 3%, and the decline was pretty broad based across all categories that have seen very high inflation, and this is largely reflective of goods spending. So, this is a pretty clear signal to us that while Omicron may be weighing on spending, inflation is largely at play here. And we still expect inflation to be peaking in January and February, so we likely will see some deterioration in consumer spending as we enter the first quarter of 2022. Ellen Zentner How weak could consumer spending be this quarter? Sarah Wolfe Right now, we just started our tracking for the first quarter of 2022 at 1.5% GDP growth, but within that, we have 1-2% contraction in real PCE. I will note that inflation's high so nominal PCE is still tracking positive, but it's not looking very good as we enter the first quarter. Ellen Zentner Yeah, it seems clear that inflation is taking a bite. And remind me, we have this great consumer pulse survey that we've been putting out, and I think it was back in November, right? That the people were actually saying, "Look, I'm more worried about inflation than Omicron or than COVID 19". And that's incredible. I mean, that's a pandemic that's been weighing on people's minds and yet inflation usurped. Sarah Wolfe We're also seeing it in the consumer sentiment surveys. The University of Michigan surveys inflation expectations each month. Near term inflation expectations have reached all-time highs. They're at 4.9%, and we're starting to see longer term expectations also start to tick up. In January, they hit 3.1%, which is a high since 2011. So, it's definitely being felt by consumers and causing a lot of uncertainty among them as well. Ellen Zentner But now, because we have this forecast that inflation is going to peak in February, which is data we have in hand in March, if we're right on that, can that give us a lot of confidence that at least households can see that there's light at the end of the tunnel and start to breathe a sigh of relief? Sarah Wolfe Yeah. As you mentioned, there are few headwinds facing the consumer right now. We think most of them are going to recede by the end of the first quarter. Ellen Zentner Another big change for the consumer versus last year, that you've been writing about is the roll off of government stimulus for a lot of Americans. That had really helped bolster consumer spending, getting us to that big growth rate in 2021 that you mentioned. But now that that's rolling off, what impact might it have on spending this year? Sarah Wolfe So, the big impact to spending is going to be felt this quarter in the beginning of 2022. And that's for two reasons. The first is that the child tax credits have come to an end. That did not get extended because the Build Back Better plan was not passed in time. and the child tax credits were boosting income for lower, middle-income households by $15B a month. And that included $300-360 payments per child per month. A lot of that was going straight into spending, food, other essential items, school supplies. So, we're going to get a level shift down in income and spending in January alone just because of the expiration. So, the other reason

Despite two good years for Treasury Inflation-Protected Securities, or TIPS, a dramatic rise in real yields may be cause for investors to reexamine their potential for 2022.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about global macro trends and how investors can interpret these trends for rates and currency markets. It's Thursday, January 27th at noon in New York. Today, I want to talk about the Treasury market, and I want to get real. Yields on Treasury notes and bonds have risen dramatically to start the year, but real yields have risen more. What are "real yields"? Let me start by assuring you that yields on regular Treasury notes and bonds aren't fake. They are very real, but not in the same way as yields on Treasury inflation-protected securities. Those inflation-protected bonds, known as TIPS, offer investors an inflation-adjusted yield. You can think about an inflation-adjusted yield as having two parts. The first part is a yield without an inflation adjustment. That's what we call the real yield. And the second part is a yield that adjusts for inflation. So, if the rate of inflation is positive, you get more than just the real yield. Last year, a lot of investors bought TIPS because inflation was high and rising. The news media covered the topic of inflation like never before in my career. So, buying a security that offered inflation protection would have made sense last year. Consumer prices rose 7% over the year, and the TIPS index returned almost 6%. So that investment strategy worked out. But, did you know that TIPS returned almost 11% in 2020, when consumer prices only rose 1.4%? That's right. TIPS were a much better investment in 2020, when there was less inflation than there was in 2021. How could that be? Well, remember the real yield that TIPS offer investors? That yield can be a very important contributor to the total return of TIPS. And, at times, it can be even more important than the yield that adjusts for inflation. Over the past couple of years, the real yields that TIPS have offered investors have been negative. So, imagine if there hadn't been any inflation over these past two years. An investment in TIPS might have been a bad one because investors would have been left with nothing but a negative yielding bond. Of course, the yield on a bond is just one factor in driving the total return that investors receive. The other is capital gain - or loss. And the change in yields over time drive capital gains or losses. If bond yields fall, bond prices rise and that improves total returns. But if bond yields rise, well, falling prices hurt total returns. And the same applies to the real yield on TIPS. Rising real yields hurts the total return of TIPS and can do so even during periods of high inflation, like today. The period since last Thanksgiving is a perfect example: inflation continued to surprise to the upside, but the real yield on 10-year maturity TIPS rose by over half a percentage point. As a result, TIPS delivered a negative total return of 3.5% during this period. This should be a valuable lesson for TIPS investors. TIPS aren't just about inflation protection, although they do offer more inflation protection than most other bonds. TIPS perform best when inflation is high and rising, and real yields are stable or they're falling. We saw that environment in 2020 and through most of 2021. But things have started to change. We expect real yields to keep rising this year and our economists expect inflation to fall. That means investors should get less yield that adjusts for inflation while having to cope with capital losses from rising real yields. It would be the worst combination for TIPS performance and stand in quite a contrast to the past two years. So our advice is to stop thinking about TIPS as just protecting against inflation. Instead, investors should think about how TIPS performance could be impacted by higher real yields. And as the Fed raises interest rates this year, real yields should rise and hurt the performance of TIPS. Thanks for listening. And 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.

2022 is likely to bring fresh challenges for the U.S.-China dynamic. Investors can expect an increase in non-tariff barriers and continued commitment to re- and near-shoring of supply chains in the US.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, January 26th at 10:00 a.m. in New York. While the ongoing situation between the Ukraine and Russia remains an obvious geopolitical risk to pay attention to, we shouldn't lose sight of the ongoing developments in the relationship between the U.S. and China. There's plenty of reason to expect that, in 2022, the two countries’ economic relationship - perhaps the most consequential in the world - will face fresh challenges. From the US's perspective, there's unfinished business. For example, the 'phase one' trade deal, signed back in January of 2020, expired at the end of 2021, and the results fell short of the agreement. Per data from the Peterson Institute, China only purchased 62% of the manufactured products, 76% of the agricultural products and 47% of the energy products it had committed to. These stats likely won't change the perception of the American voter, where issue polls show a bipartisan consensus that the U.S. relationship with China continues to be a problematic one. And since 2022 is a midterm election year, don't expect U.S. policymakers to stand pat on the issue. So what can we expect? We've covered before how the U.S. has, and likely will continue, to raise non-tariff barriers with China - things like export controls around sensitive technologies and investment restrictions. These deployments will continue to make for a more challenging environment for U.S. companies seeking easy access to China's markets, either to sell or produce goods. But one thing you can also expect is fresh legislative action to invest in the US's capabilities in key industries and supply chains that have been declared essential for economic and national security purposes. For example, news broke this week that the U.S. House of Representatives was starting its work to advance the U.S. Innovation and Competition Act, or USICA. The bill passed the Senate last year with substantial bipartisan support and would spend over $200B on research in artificial intelligence, quantum computing and biotechnology, in addition to cultivating local supply chain sources for key tech needs, like rare earths. This dynamic underscores a trend we've been focused on for many years. The slow but steady re and near shoring of supply chains for U.S. companies. It's a key reason our colleagues in equity research continue to see an opportunity in the capital goods sector, calling for a 'generational capex cycle over the next several years, driven by supply chain investment'. So stay tuned. We'll keep tracking this trend and keep you informed. 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.

With inflation on the minds of consumers and the Fed reacting with a sharp turn towards tightening, 2022 may be a year for investors to focus on incorporating tax-efficient strategies into their portfolios. Morgan Stanley Wealth Management’s Chief Investment Officer Lisa Shalett and Chief Cross-Asset Strategist Andrew Sheets 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 today on the podcast, we'll be discussing the importance of tax efficiency as a pillar of portfolio construction. It's Tuesday, January 25th at three p.m. in London.Lisa Shalett And it's 10:00 a.m. here in New York.Andrew Sheets Lisa, welcome back to the podcast! Now, as members of Morgan Stanley Wealth Management's Global Investment Committee, we both agree that the current portfolio construction backdrop is increasingly complicated and constrained. But tax considerations are also important, and this is something you and your team have written a lot on recently. So I'd really like to talk to you about both of these issues, both the challenges of portfolio construction and some of the unique considerations around tax that can really make a difference to the bottom line of investment returns. So Lisa, let's start with that current environment. Can you highlight why we believe that standard stock bond portfolios face a number of challenges going forward?Lisa Shalett We've been through an extraordinary period over the last 13 years where both stocks and bonds have benefited profoundly from Federal Reserve policy, just to put it bluntly, and, you know, the direction of overall interest rates. And so, our observation has been that, you know, over the last 13 years, U.S. stocks have compounded at close to 15% per year, U.S. bonds have compounded at 9% per year. Both of those are well above long run averages. And so we're now at a point where both stocks and bonds are quite expensive. They are both correlated to each other, and they are both correlated to a large extent with Federal Reserve policy. And as we know, Federal Reserve policy by dint of what appears to be inflation that is not as transitory as the Fed originally thought is causing the Fed to have to accelerate their shift in policy. And I think, as we noted over the last three to six weeks, you know, the Fed's position has gone from, you know, we're going to taper and have three hikes to we're going to taper be done by March. We may have as many as four or five hikes and we're going to consider a balance sheet runoff. That's an awful lot for both stocks and bonds to digest at the same time, especially when they're correlated with one another.Andrew Sheets And Lisa, you know, if I can just dive into this a little bit more, how do you think about portfolio diversification in that environment you just described, where both stocks and bonds seem increasingly linked to a single common factor, this this direction of Federal Reserve policy?Lisa Shalett One of the things that we've been emphasizing is to take a step back and to recognize that diversification can happen beyond the simple passive betas of stocks and bonds, which we would, you know, typically represent by, you know, exposures to things like the S&P 500 or a Barclays aggregate. And so what we're saying is, within stocks, you've got to really make an effort to move away from the indexes to higher active managers who tend to take a diversified approach by sector, by style, by market cap. And within fixed income, you know, we're encouraging, clients to hire what we've described as non-core managers. These are managers who may have the ability to navigate the yield curve and navigate the credit environment by using, perhaps what are nontraditional type products. They may employ strategies that include things like preferred shares or covered call strategies, or own asset backed securities. These are all more esoteric instruments that that hiring a manager can give our clients sources of income. And last, you know, we're obviously thinking about generating income and diversification using real assets and alternatives as well.Andrew Sheets And so, Lisa, one other thing you know, related to that portfolio construction challenge, I also just want to ask you about was how you think about inflation protection. I mean, obviously, I think a lot of investors are trying to achieve the highest return relative to the overall level of prices relative to inflation. You know, how do you think from a portfolio context, investors can try to add some inflation protection here in a smart, you know, intelligent way?Lisa Shalett So you know what we've tried to say is let's take a step back and think about, you know, our forecast for, you know, whether inflation is going to accelerate from here or decelerate. And you know, I think our

All eyes are on the Fed as they implement a sharp pivot to account for higher inflation being felt by consumers and businesses alike. With these shifts we turn our attention to the ‘Ice’ portion of our ‘Fire & Ice’ narrative: slowing growth.----- 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 24th at 11:30 a.m. in New York. So let's get after it. Investors have recently become fixated on the Fed's every move. That makes sense, with the Fed pivoting so aggressively on policy over the past few months. It also fits nicely with the first part of our well-established "Fire and Ice" narrative and our view that equity valuations are vulnerable. The reason for the Fed's sharp pivot is obvious, as inflation has overshot its goals - leading to problems for the real economy, not to mention the White House. When the Fed first announced its inflation targeting policy in the summer of 2020, it was appropriate given the deflationary effects of the pandemic. Therefore, it's now just as appropriate for the Fed to tighten at an accelerated pace to fight the inflation overshoot. However, this is a big change for a Fed that has been fighting the risk of deflation for 20+ years, and it has market implications. Importantly, consumers are truly starting to feel the impacts of inflation, with the University of Michigan Confidence Survey currently at levels typically observed only in recessions. Small businesses are also feeling the pain, as demonstrated by their difficulty finding employees and the prices that they are paying for supply and logistics. In short, the Fed is serious about fighting inflation, and it's unlikely they will be turning dovish anytime soon, given the seriousness of these economic threats and the political cover to take action. The good news is that markets have been digesting this tightening for months. Despite the fact that major U.S. large cap equity indices are only down 10-15% from their highs, the damage under the surface has been much worse for many individual stocks. Expensive, unprofitable companies are down 30-50%. This is appropriate, in our view, not just because the Fed is pivoting, but because these kinds of valuations don't make sense in any kind of investment environment. In short, the froth is coming out of an equity market that simply got too extended on valuation - the key part of our 2022 outlook published in November. But attention should now turn to the Ice part of our narrative - slowing growth. As we've been writing for months, we view the current deceleration in growth as more about the natural ebbing of the cycle than the latest variant of COVID. In fact, there are reasons to believe that we are closer to the end than the beginning of this pandemic. However, that also means the end of extraordinary stimulus, both monetary and fiscal. It also means looser supply chains as restrictions ease and people fully return back to work. Better supply is good for fighting inflation, but it may also reveal the degree to which demand has been supported and overstated by double ordering. This would fit nicely with the 1940s analogy that we have also detailed in our 2022 outlook. In brief, the end of the Second World War freed pent up savings and unleashed demand into an economy unable to supply it. Double digit inflation ensued, which led to the first Fed rate hike in over a decade and the beginning of the end of financial repression. Sound familiar? Shortly thereafter, inflation plummeted as demand normalized, but the Fed never returned to the zero bound on interest rates. Instead, we began a new era of shorter booms and busts as the world adjusted to the higher levels of demand, as well as cost of capital and labor. The end of secular stagnation and financial repression has arrived, in our view, but it won't be a smooth ride. In the near term, hunker down for a few more months of winter as slowing growth overtakes the Fed as the primary concern for markets. In such a world, we continue to favor value over growth, but with a defensive rather than cyclical bias. 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.

Higher levels of inflation have made it a hot topic among investors. While inflation’s effects cannot be avoided completely, there are some strategies that can help protect against the worst of them.----- 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 21st at 2:00 p.m. in London. One question we get a lot at the moment is “how can I protect my investments against inflation?”. While Morgan Stanley's economists do expect inflation to moderate this year - actually starting this quarter - the high current readings on inflation have made it a hot topic. One of the biggest investing challenges with inflation is that when it's truly high and persistent - the kind of inflation that we saw in, say, the 1970s - it's simply bad for everything. That decade saw stocks, bonds and real estate all perform poorly. There was simply nowhere to hide. Still, investors do look at specific strategies to try to hedge inflation. Unfortunately, some of these, we think, have challenges. One place that investors look to protect against the effects of inflation is precious metals, like gold. But while gold has a very impressive track record of maintaining value throughout thousands of years of human history, its day to day and month to month relationship with inflation is kind of shaky. Gold can actually do worse when interest rates rise because gold, which doesn't provide any income, starts to look worse relative to bonds, which do. And note that over the last six months, when inflation has been elevated, gold hasn't performed particularly well. Another popular strategy is owning treasury inflation protected securities, or TIPS, which have a payout linked to inflation. I mean, the inflation protection is in the name. Yet if you look at the actual performance of these securities, that inflation protection isn't always so simple. TIPS performed well in 2020, a year when inflation was low, and they performed poorly in 2018 and over the last three months, when inflation was higher. The reason for this is that TIPS are also sensitive to the overall level of interest rates - and if those are going up, they can see their performance suffer. These two examples are part of the reason that, when we think about protecting portfolios against elevated inflation, what we're often trying to do is to avoid sensitivity to real interest rates, which, at the moment, we think will continue to rise. We think this favors keeping lighter exposure overall, favoring energy over metals and commodities, favoring stocks in Europe and Japan over those in the U.S. and emerging markets, and being underweight real interest rates directly in government bonds. 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.

The foundation for the housing market remains healthy in 2022, with responsible lending standards and a tight supply environment, but, as the year continues, affordability challenges and a more hawkish Fed will likely slow appreciation and dampen housing activity.----- Transcript -----James Egan Welcome to Thoughts on the Market. I'm James 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. James Egan And on this edition of the podcast, we'll be talking about the 2022 outlook for the U.S. housing market. It's Thursday, January 20th at 10:00 a.m. in New York. James Egan All right, Jay. Now, since we published the outlook for 2022, the market has already priced in a much more hawkish Fed and Fed board members really haven't been pushing back. We've now priced in 100 basis points of hikes in 2022 in addition to quantitative tightening. How does this change how you're thinking about the mortgage market? Jay Bacow When we went into the year, we thought that mortgage spreads looked pretty tight and thought they were going to go wider, and that was in a world where we just thought the Fed was going to be tapering and stop buying mortgages, but still reinvesting. Now that they're pricing in that the Fed is going to be hiking rates and normalizing their balance sheet, mortgage spreads have widened about 20 basis points this year, but we think they have further room to go. This is because a normalizing Fed is going to mean that the supply to the market in conjunction with the net issuance is going to be the highest that the private market has ever had to digest. So, we think that could push spreads about 10 or 15 basis points wider, which is going to weigh on mortgage rates, but mortgage rates have already been going up. They are about 3/8 of a point higher just over the last month. And when we forecast mortgage spreads and interest rates to go higher over the next year, we think this could end up with about a full point rise in mortgage rates this year. Jay Bacow So, Jim, a point move higher in mortgage rates. What does that do to affordability? James Egan The short answer is they don't help affordability. For people who've been listening to our podcast before, affordability largely has three main components: home prices, mortgage rates and incomes. And so, if we're talking about mortgage rates, a full 100 basis points higher, that's going to be bad for affordability. But look, this just reinforces what we're thinking about affordability with respect to the housing market as we look ahead to 2022. In our outlook, we described affordability as the chief headwind to home prices and housing activity this year. Looking back to the end of 2021, home prices were climbing at a record pace of growth. And one of the good things about this climb is we think it's been healthier than the prior times that HPA even approached these levels. We got to almost 20% year over year growth because of the fact that we had an historically tight supply environment, and we had a lot of demand, and that demand was not being stimulated by easing lending standards. Lending standards themselves remained very responsible. James Egan But just because the foundation of the housing market today is healthy, and we believe it is, that doesn't mean it can't be too expensive. As home prices were climbing, mortgage rates continued to fall to record lows, and that really acted as a release valve with respect to affordability in the market. That release valve has already been turned off. Mortgage rates climbed throughout 2021. We expected them to climb in 2022. Yes, we now see them climbing faster than we anticipated, but that release Valve, as I mentioned, was already turned off. Affordability was already a substantial headwind in our call. Jay Bacow All right, Jim. So, we've talked about affordability. Can you remind us where do home prices currently stand? Haven't they started to come down a little bit? James Egan Yes. Home prices have been slowing for two months now. And it's becoming more pervasive geographically. James Egan As recently as July, 100 of the top 100 metro areas in the country, were not only seeing home prices grow year over year, but that pace of growth was accelerating. Five months later, the most recent data we have there is November, it's fallen from 100 out of 100 to 38 out of 100 metro areas, still seeing acceleration. The other 62? They're still climbing. But the pace of that growth has slowed. Jay Bacow All right, so home price growth is slowing. Does this mean that it just continues to slow and home prices actually go negative this year? James Egan We do think that home price growth will continue to slow, but we definitively think it will remain positive. We do not see home price growth going negative on a year over year basis. One of the biggest reasons there:

In 2021, many expected the US dollar to face significant challenges yet the year ended with strong levels coming off a mid-year rally. As we look out at 2022, how much more can the dollar rise and where do other currency opportunities lie?----- Transcript -----Welcome to Thoughts on the Market. I'm James Lord, Global Head of Foreign Exchange and Emerging Market Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the outlook for the US dollar and global currency markets. It's Wednesday, January 19th at 2:00 p.m. in London. This time last year, many strategists on Wall Street were expecting 2021 to turn out badly for the US dollar. But as we now know, the dollar ended the year much differently. The dollar troughed on January 6th, spent the first half of the year moving sideways, then began a pretty strong rally mid-year and finished the year around the strongest levels since July of 2020. And the question we've all been asking ourselves recently is - how much more can the dollar rise in 2022? Well, this year, most analysts and investors expect the dollar to continue to rise. But if last year's track record of prediction is anything to go by, this probably means that the dollar could instead head lower over the next 12 months. Our team at Morgan Stanley believes that the US dollar could be close to peaking. In fact, we've just changed our dollar call to neutral, which means we think it will just go sideways from here - after being bullish the dollar since June last year. Here's why: the Federal Reserve has indicated it may be close to raising interest rates, and we think that the Fed starting an interest rate hiking cycle could be a signal that the dollar's rise is close to finished. This may seem counterintuitive, since rising interest rates tend to strengthen currencies. But the US dollar has actually already gone up on the back of rising interest rates. A year ago, the market wasn't expecting any rate hikes for the year ahead. Now, the market is expecting nearly four hikes and for lift off to potentially begin as soon as March. If we look back at the last five cycles where the Fed has hiked interest rates, we can see the same pattern every time. The US dollar tends to rise in the months before liftoff, but fall in the months afterwards. This is a great example of buying the rumor and selling the fact. And if the market is right and the Fed hikes rates as soon as March, the peak of the US dollar for this cycle may not be too far away. We also need to remember that the dollar doesn't stand in isolation. Currencies are always a relative game and are valued against the currencies of other economies. Because of that, what happens in other parts of the world also affects the value of the US dollar. And what we've seen recently is that other central banks are also starting to think about tightening policy and raising interest rates, which will, to some extent, offset Fed hikes - reducing their impact on the dollar. We think this may be a good time for investors to start to reduce their dollar long positions, not add to them. What does the future hold for emerging market currencies? The consensus view is very negative on emerging markets, and that is the polar opposite of this time last year when everybody loved them. Like last year, though, we suspect the consensus view will probably be wrong by the time we close the year. Valuations on emerging market currencies and local currency bonds are cheap. If inflation peaks over the next few months, as Morgan Stanley economists expect, then investors may well take another look at emerging market bonds and any inflows would strengthen their currencies. Bottom line: the dollar has probably peaked for the year, but the future for emerging market currencies is brighter than most people think. As ever, the trick is in the timing. Stay tuned. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleague today.

While our outlook for 2022 already called for a hawkish Fed, recent signals from the central bank of more aggressive tightening have given cause to reexamine some of our calls while remaining steadfast in key aspects of our narrative for the year.----- 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 18th at 11:30 a.m. in New York. So, let's get after it. Last week, our economics team adjusted its forecast on Fed policy, given the more hawkish tone in the most recent Fed minutes and commentary from Chair Powell and other governors. We now expect the Fed to fully exit its asset purchase program known as quantitative easing by April. We also expect the Fed to increase rates by 25 basis points 4 times this year and begin balance sheet normalization by July. That's a lot of tightening, and fits with our general outlook for 2022 that we published back in November. To recall, our Fire and Ice narrative assumed the Fed was behind the curve and would need to catch up in a hurry, given the dramatic move in inflation that we've experienced during this pandemic. Public outcry and consumer confidence measures suggest inflation is the number one concern right now - making this a political issue as much as an economic one. Expect the Fed to keep pushing until financial conditions tighten. What that means for equity markets is that valuations should come down this year via a combination of higher long term interest rates and higher equity risk premiums. The changes to our Fed forecast simply mean it's likely to happen faster now, making the hand-off between lower valuations and higher earnings more challenging. This is the classic finishing move to the mid-cycle transition we've been anticipating for months, and it appears we've finally arrived. Our outlook for 2022 incorporated a fairly hawkish Fed, and while that hawkishness has increased since we published in mid-November, it doesn't change our year-end targets, which are already well below the consensus. Specifically, our base case year-end target for the S&P 500 is 4400. This compares to the median forecast of approximately 4900. Our target assumes a meaningfully lower Price Earnings multiple of 18x the forward 12-month earnings. This would be a 15% drop from the current Price Earnings multiple of 21x. Our EPS forecast is largely in line with consensus. In short, our view differs with consensus mainly on valuation rather than growth. The faster ending to QE and more aggressive rate hikes simply brings this valuation risk forward to the first half of the year. Furthermore, given the Fed's new guidance it will try to shrink its balance sheet, means valuations could even overshoot to the downside of what we think is fair value. Bottom line, the bringing forward of tapering and rate hikes is likely to lead to a 10-20% correction in the first half of this year for the S&P 500, in our view. The good news is that markets have been adjusting for months to this new reality, with 40% of the Nasdaq having corrected by 50% or more. As we've noted many times, the breadth of the market remains poor as it goes through the classic rolling correction under the surface as the index grinds higher. This phenomenon is largely due to the relentless inflows from retail investors into equities. On one hand, this rotation from bonds to stocks by asset owners makes perfect sense in a world of rising prices. After all, stocks are a decent hedge against inflation, unlike bonds. However, certain stocks fit that billing better than others. In its simplest form, it means value over growth stocks or short duration over long - think dividend growth stocks. In addition, we would favor defensively oriented value stocks relative to cyclicals, given our view growth may slow a bit more in the near term before re-accelerating in the second half. Bottom line, don't fight the Fed and be patient with new capital deployments until later this Spring. 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.

After two years of support and accommodation from the Fed, 2022 is seeing a shift in tone towards the strength of the economy and risks of inflation, meaning investors may need to reassess expectations for the 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 14th at 2:00 p.m. in London. Sometimes in investing, if you're lucky, you make a forecast that holds up for a long time. Other times, the facts change, and your assumptions need to change with them. We've just made some significant shifts to our assumptions for what the Federal Reserve will do this year. I want to discuss these new expectations and how we got there. The U.S. Federal Reserve influences interest rates through two main policy tools. First, it sets a target rate of interest for very short-term borrowing, which influences a lot of other interest rates. And second, it can buy government bonds and mortgages directly - influencing the rate that these bonds offer. When COVID struck, the Federal Reserve pulled hard on both of these levers, cutting its target interest rate to its lowest ever level of zero and buying trillions of government bonds and mortgages to support these markets. But now, almost two years removed from those actions, the tone from the Fed is changing, and quickly. For much of 2021, its message focused on erring on the side of caution and continuing to provide extraordinary support, even as the U.S. economy was clearly recovering. But now, that improvement is clear. The U.S. unemployment rate has fallen all the way to 3.9%, lower than where it was in January of 2018. The number of Americans claiming unemployment benefits is the lowest since 1973. And meanwhile, inflation has been elevated - with the U.S. consumer prices up 7% over the last year. All of this helps explain the sharp shift we've seen recently in the Fed's tone, which is now focusing much more on the strength of the economy, the risks of inflation and the need to dial back some of its policy support. It's this change of rhetoric, as well as that underlying data that's driven our economists to change their forecasts for the Federal Reserve. We now expect the Fed to raise interest rates 4 times this year, by a total of 1%. Just as important, we think they not only stop buying bonds in March, but start reducing their bond holdings later in the year - moving from quantitative easing, or QE, to so-called quantitative tightening, or QT. The result should help push U.S. 10-year yields higher up to 2.2%, in our view, by the middle of the year. For markets, we think this should continue to drive a bumpy first quarter for U.S. and emerging market assets. We think European stocks and financial stocks, which are both less sensitive to changes in interest rates, should outperform. 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.

Confirmation hearings for Fed Chair Powell’s second term highlighted the challenges for the year ahead. Inflation concerns fueled by high demand and disrupted supply chains, a tight labor market and the trajectory of the ongoing pandemic will make guessing the Fed’s next moves difficult in 2022.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Thursday, January 13th at 10:00 a.m. in New York. A key focus in D.C. this week is the Senate confirmation hearings for Fed Chair Jay Powell, who's been nominated for another term at the helm of the Federal Reserve. Whenever the Fed chair speaks, it's must-see TV for bond investors. And this remains as true as ever this week. See, the Fed has a really tough job ahead of them. The economy is humming, and it's nearing time to tighten monetary policy and rein in inflation. We know from their most recent meeting minutes that the Fed sees it this way. But how quickly to do it, and by what method to do it, well, that's more up for debate. That's because, in fairness to the Fed, there's no real template for the challenge that's ahead of them. The pandemic and the economic recovery from it have presented an unusual and hard to gauge set of inputs to monetary policy decision making. Take inflation, for example. There's no shortage of potential overlapping causes for the currently high inflation reads: supply chain bottlenecks; an unprecedented rapid rebound in demand for goods, both in absolute terms and relative to services; a sluggish labor force participation rate; and, influencing each of these variables, the trajectory of a global pandemic. The Fed's job, of course, is to assess to what degree these factors are temporary or enduring, and calibrate monetary policy accordingly to bring inflation to target. But to state the obvious, this is complicated. So it's not surprising that the recent Fed minutes showed they're considering a wide range of monetary tightening options. A lot is on the table around the number of rate hikes, pace of rate hikes and pace of balance sheet normalization. We expect Chair Powell will be further underscoring this desire for optionality in monetary policy in his forthcoming statements. Of course, another phrase for optionality might be policy uncertainty, and this is exactly the point we think bond investors should focus on. Precisely guessing the Fed's every move is likely less important than understanding the Fed has, and can continue, to change its approach to monetary tightening as it collects more data and better understands the current inflation dynamic. This is the genesis of the recent uptick in bond market volatility, which we expect will be an enduring feature of 2022. But volatility can mean opportunity, particularly for credit investors, in our view. Corporate and municipal bond credit quality is very strong, but both markets have a history of underperforming during moments of Treasury market volatility. That's why my colleagues and I are recommending for both asset classes to start the year with portfolios positioned cautiously, allowing you to take advantage of better valuations when they present themselves. In this way, like the Fed, you too will have options to deal with uncertainty. 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 acute bottlenecks in supply chains resolve in the long-term, some structural issues may remain, creating both opportunities and challenges for policymakers, industry leaders, and investors.----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, head of public policy research and municipal strategy for Morgan Stanley.Daniel Blake And I'm Daniel Blake, equity strategist covering Asia and emerging markets.Michael Zezas And on part two of this special edition of the podcast. We'll be assessing the long term restructuring of global supply chains and how this transition may impact investors. It's Wednesday, January 12th at 9 a.m. in New York.Daniel Blake And it's 10:00 p.m. in Hong Kong.Michael Zezas So, Daniel, we discussed the short and medium term for supply chains, but as we broaden out our horizon, which challenges are temporary and which are more structural?Daniel Blake We do think there are structural challenges that are emerging and have been present for some time, but have been exacerbated by the COVID pandemic and by this surge in demand that we're seeing and a panic about ordering. So we are seeing them most acute in areas of transportation where we don't expect a return to pre-COVID levels of freight rates or indeed lead times. We also see more acute pressures persisting in parts of the leading edge supply chain in semiconductors, as well as in areas of restructuring around decarbonization, for example, in EV materials and the battery supply chain. But more temporary areas are those that have been subject to short-term production shortfalls and areas where we are seeing demand that has been pulled forward in some regards and where we are also seeing the channel being restocked in areas that were not necessarily production disrupted. And so this in the tech space, for example, is more acute in some consumer electronics categories as opposed to autos, where we do have very lean inventory positions and it will take longer to rebuild.Daniel Blake But in the short run, we do think what will be important to watch will be the development of new COVID variants and the responses from policymakers and public health officials to those and the extent to which production and distribution can be managed in the context of those challenges. So really, I think a lot comes back to the public policy decision. So what are you seeing and tracking most closely from here?Michael Zezas Yeah, I think it's important to focus on the choices made by policymakers globally. You and I have talked about and reported on this concept of a multi-polar world. This idea that there are multiple economic power poles and that each of them might be pursuing somewhat different strategies when it comes to trade rules, tech standards, supply chain standards, et cetera. So I think the US-China dynamic is a great example of this. Obviously, over the last several years, the U.S. and China have shifted to a model where they define for themselves what they think is in their best economic and national security interest and in order to promote those interests, adopt a set of policies that are both defensive and offensive. So with the U.S., for example, there were tariff increases in 2018 and 2019. Since then, they have mostly shifted to raising non-tariff barriers like export restriction controls and increasingly over the last year have also been pivoting towards offensive tactics. So promoting legislation to invest in reshoring like the US ICA. So what this means then is that companies that had been benefiting from globalization and access to end markets and production processes in the U.S. and China now may need to recalibrate and take on new costs when they're transitioning their value chain for these conditions of kind of new barriers, new frictions in commerce between the U.S. and China.Daniel Blake And take us through the corporate perspective. What are you seeing and how should we think about the corporate response to these supply chain challenges?Michael Zezas A conceptual framework we laid out was to put different types of corporate sectors into categories based on how much their production processes or end markets were subject to increasing trade and transportation friction and or subject to labor shortages. And we came up with four different categories using these two axes. The first category is bottlenecks, where you have tight labor conditions and increasing trade and transportation friction, leaves these industries little choice but to pass through higher costs. Reshorers is another category where you're potentially facing further production cost hikes from trade and transportation friction but these firms are increasingly interested in domestic investment that can steady their supply chain challenges. There's also global diversifiers where trade and transportation frictions may be steady, but labor scarcity and disruption risk creates margin pressure. So that pushes sectors like these to invest i

Supply chain delays are on the minds of not only investors, policymakers and business owners, but the average consumer as well. How will recent challenges to supply chains be resolved in the near-term and will this create opportunity for investors?----- Transcript -----Michael Zezas Welcome to Thoughts on the Market. I'm Michael Zezas, head of public policy research and municipal strategy for Morgan Stanley.Daniel Blake And I'm Daniel Blake, equity strategist covering Asia and emerging markets,Michael Zezas And on part one of this special edition of the podcast. We'll be assessing the near-term restructuring of global supply chains and how this transition may impact investors. It's Tuesday, January 11th at 9 a.m. in New York.Daniel Blake And it's 10:00 p.m. in Hong Kong.Michael Zezas So, Daniel, we recently collaborated on a report, "Global Supply Chains, Repair, Restructuring and investment Implications." In it, we take a look at the story for supply chains over the short, medium and long term. Now, obviously supply chains are on the minds of not only investors and policymakers, but the average consumer as well. So I think the best place to start is, how did we get here?Daniel Blake Thanks, Mike. What we're seeing actually is a surge in demand for goods, particularly coming out of the US economy. As we're seeing accommodation of a record stimulus program post-World War Two, combined with a share in spending that has shifted from services towards goods that has been unprecedented. For example, to put this in context, we're seeing U.S. consumer spending on goods increased by 40% in the two years between October 2019, pre-COVID, to October 2021. And that compares with 28% increase that we saw in the entire 11 years following the financial crisis. And so what we're seeing is a sharp fall in services being more than made up for with an increase in spending on goods. And that's put enormous stress on supply chains, production levels, capacity of transportation. And in conjunction with the surge in demand that was seen, we've also seen some acute difficulties emerge in parts of supply chains impacted by COVID. For example, in South Southeast Asia, we've seen semiconductor fabrication, we've seen assembly, and we're seeing components being impacted by staffing issues as a result of COVID health precautions. And this has all been made worse by the uncertainty about sourcing products and lead times. So what we're seeing is manufacturers, we're seeing suppliers, distributors and the and the end corporates that are facing the consumer, putting in additional orders, whether that component is in short supply or not. And so that's increased the stress in the system and created uncertainty about where underlying demand sitsDaniel Blake And so, Mike, amidst this uncertainty, policymakers have really taken note of the issues, not least because of the inflation that's been generated. What reactions are you seeing from the administration, from Congress and from the Fed?Michael Zezas This is obviously unprecedented volatility in the behavior of the American consumer. And so not surprisingly, in the U.S., policymakers don't have the types of tools immediately at their disposal to deal with this. So you've actually seen the administration pull the levers that they can, but they're relatively limited. They've made certain moneys available, for example, for overtime work for port workers and transportation workers to help speed along the process of inventory accumulating at different ports of entry in the US. But there aren't really any comprehensive tools beyond that that are being used.Michael Zezas Daniel, what about policymakers in Asia and emerging markets? How are they reacting?Daniel Blake Yeah. In the short run, we're seeing a combination of tightening of monetary policy. For example, over 70% of emerging markets have been hiking rates by the fourth quarter of 2021. But we're also seeing competition for investment in global supply chains as they are being diversified by OEMs and as we're seeing some restructuring taking place. So we're seeing overall this competition happening across the value chain from battery materials like lithium and nickel in markets like Indonesia all the way through to leading edge 3D semiconductor manufacturing, where companies in Japan are partnering with industry leader Taiwan Semiconductor Manufacturing Corporation to try to pursue leading edge technology. So we are seeing this competition being a key feature of medium term trends.Michael Zezas So, Daniel, clearly a challenge in the near term to supply chains in the economy. What's our view on how this resolves itself?Daniel Blake Yeah, we have identified in conjunction with the global research team the most acute choke points, the primary choke points. And the short answer is we are seeing improvement in these in these areas. For example, in semiconductors, manufacturing capacity in in the backend foundry that was seen in Southeast Asia, we ar

As the year gets underway, we are seeing an aggressive rotation from growth to value stocks, triggered by Fed tapering. Will 2022 follow the patterns of the ‘taper tantrum’ of 2013?----- 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 10th at 11:30 a.m. in New York. So let's get after it. 2022 is off to a blazing start with one of the most aggressive rotations from growth to value stocks we've ever seen. However, much of this rotation in the equity markets began back in November, with the Fed's more aggressive pivot on monetary policy. More specifically, the most expensive stocks in the market were down almost 30% in the last two months of 2021. Year to date, this cohort is down another 10%, leaving 40% of the Nasdaq stocks down more than 50% from their highs. Is the correction over in these expensive stocks yet? What has changed since the turning of the calendar is that longer term interest rates have moved up significantly. In fact, the move in 10-year real rates is one of the sharpest on record and looks similar to the original taper tantrum in 2013. However, as already mentioned, equity markets have been discounting this inevitable move in rates for months. Perhaps the real question is, why is the rates market suddenly waking up to the reality of higher inflation and the Fed's response to it - something it has telegraphed for months? We think it has to do with several tactical supports that are now being lifted. First, the Fed itself likely increased its liquidity provisions at year-end to support the typical constraints in the banking system. Meanwhile, many macro speculators and trading desks likely shut down their books in December, despite their fundamental view to be short bonds. This combination is now reversed and simply added fuel to a fire that had been burning for months under the surface. Based on the move in 2013, it looks like real rates still have further to run, potentially much further. Our rates strategists believe real rates are headed back to negative 50 basis points, which is another 25 basis points higher. From our perspective, real rates are unreasonably negative given the very strong GDP growth. Therefore, the Fed is correct to be trying to get them higher. It's also why tapering may not be tightening for the economy, even though it's the epitome of tightening financial conditions for markets. We have discussed this comparison to 2013 in prior research and made the following observations as it relates to equity markets. First, the taper tantrum in 2013 was the first of its kind and something for which the markets had not been prepared. Therefore, the move in real rates was much more severe and swift than what we would expect this time around. Second, valuations were much more attractive in 2013 based on both price/earnings multiples and the equity risk premiums, which adjust for absolute levels of rates, which are much lower today. Listeners may find it surprising to learn that the price/earnings multiple for the S&P 500 is actually higher today than when the Fed first announced its plan to taper asset purchases back in September. In other words, valuations have actually increased as the tapering has begun, at least for the broader S&P 500 index. This is also similar to what happened in 2013 and makes sense. After all, Fed tightening is a good sign for growth and evidence that its policy has been successful. However, this time the starting point on valuations is much higher as already noted. More importantly, growth is decelerating, whereas in 2013 it was accelerating. This applies to both economic and earnings growth. In this kind of an environment, the most expensive parts of the market remain the most vulnerable. This argues for value to outperform growth stocks. However, given the deceleration in growth, we favor the more defensive parts of value rather than the cyclicals like we did during the first quarter of 2021. This means Healthcare, Staples, REITs and Utilities. And some financials for a little offense to offset that portfolio. 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.

The start of 2022 has brought a surge in COVID cases, new payroll data, increased geopolitical risks, and shifts from the Fed. Despite these new developments, we think the themes from our 2022 outlook still apply.----- 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 7th at 2:00 p.m. in London. Right out of the gates, 2022 is greeting us with a surge of COVID cases, a US unemployment rate below 4%, geopolitical risk and new hawkish Fed communication. Amidst all these issues, the question waiting for investors is whether the thinking of late last year still holds. We think the main themes of our 2022 outlook still apply - solid growth and tighter policy within an accelerated economic cycle. But clearly, there are now a lot more moving parts. One of those moving parts is the growth outlook. Our 2022 expectation was that global growth remains above trend, aided by a healthy consumer, robust business investment and healing supply chains. But can that still hold given a new, more contagious COVID variant? For the moment, we think it can. Our economists note that global growth has become less sensitive to each subsequent COVID wave as vaccination rates have risen, treatment options have improved and the appetite for restrictions has declined. Modeling from Morgan Stanley's US Biotechnology team suggests that cases in Europe and the US could peak within 3-6 weeks, meaning most of this year will play out beyond that peak. Having already factored in a winter wave of some form in our original economic forecast, we don't think, for now, the main story has changed. There are, however, some wrinkles. Because China is pursuing a different zero COVID policy from other countries, its near-term growth may be more impacted than other regions. And the emergence of this variant likely reinforces another prior expectation: that developed market growth actually exceeds emerging market growth in 2022. A second moving part is a shift by the Federal Reserve. Last January, the market assumed that the first Fed rate hike would be in April of 2024. Last August? The market thought it would be in April of 2023. And today, pricing implies that the first rate hike will be this March. An update from the minutes of the Federal Reserve's December meeting, released this week, only further reinforced this idea that the Fed is getting closer and closer to removing support. The Fed discussed raising rates sooner, raising them faster and reducing the amount of securities that they hold. Indeed, it would seem for the moment that central banks in a lot of countries are increasingly comfortable pushing a more hawkish line until something pushes back. And so far, nothing has. Equity markets are steady, credit spreads are steady and yield curves have steepening over the last month. The opposite of what we would expect if the markets were afraid of a policy mistake. As such, why should they stop now? For markets, therefore, our strategy is based on the idea of less central bank support to start the year. Our Foreign Exchange team expects further US dollar appreciation, while our US interest rate strategists think that yields will move higher, especially relative to inflation. We think that combination should be negative for gold but supportive for financial stocks both in the US and around the world. 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.

Despite last year’s strong showing for European equities, will the recent spread of the Omicron variant derail our positive outlook for the region in 2022?----- 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 recent rise in Omicron cases and whether this could derail our constructive view on European equities for 2022. It's Thursday, January the 6th at 2:00 p.m. in London. Before touching on Omicron and the case for European stocks in 2022, I want to start by looking back at last year, which ended up being a very good one for the region. True European equities did lag US stocks again in 2021, however, this is hard to avoid when global markets are led higher by technology shares given Europe has fewer large cap companies in this space. More impressive was Europe's performance against other regions such as Japan, Asia and emerging markets. In fact, when we measure the performance of MSCI Europe against the MSCI All Countries World Index, excluding U.S. stocks, then we find that Europe enjoyed its best year of outperformance since 1998 which, to provide some context, was the year before the euro came into existence. As ever, past performance is not necessarily a good guide to future returns. However, in this instance, we do expect another year of positive returns for European stocks in 2022, with 7% upside to our index target in price terms, which rises to 10% once dividends are included. This is considerably better than our Chief US Equity Strategist, Mike Wilson, expects for the S&P, while Jonathan Garner, our Chief Asian Equity Strategist, also remains cautious on Asian and emerging markets at this time. While we think the underlying assumptions behind that positive view on European stocks are actually quite conservative - we model 10% EPS growth and a modest PE de-rating - equity investors are likely to have to navigate greater volatility going forward, given scope for higher uncertainty around COVID, inflation, and the impact of tighter monetary policy on asset markets. The first of these factors was arguably the most important for markets through November and December, however, recent evidence that emerged very late in the year - that Omicron is indeed considerably less severe than prior mutations - has boosted risk appetite across the region, helping push bond yields and equity prices higher. From a more fundamental perspective, we are also encouraged that the sharp rise in COVID cases across Europe over the last couple of months does not appear to be having a significant impact on the economy. Yes, we did see quite a sharp drop in business surveys in Germany through December, however, this doesn't appear to be replicated elsewhere with the PMI services data in France and consumer confidence data in Italy staying strong for now. Going forward, we expect the driver of volatility and uncertainty to shift from COVID to central banks and the impact of tighter monetary policy on asset markets. While this issue will be relevant across all global markets, Europe should be less negatively impacted than elsewhere given the European Central Bank is unlikely to raise interest rates through 2022. In addition, the European equity market's greater exposure to the more value-oriented sectors such as commodities and financials, should make it a relative beneficiary of rising bond yields, especially if - as our Macro Strategy team forecast - this is accompanied by rising real yields (which should weigh most on the more expensive stocks in the US) or a stronger US dollar (which is more of a headwind for emerging markets). Consistent with this outlook, we maintain a strong bias for value over growth here in Europe, with a particular focus on banks, commodity stocks and auto manufacturers. While all three of these sectors outperformed last year, we think they are still cheap and hence offer more upside from here. 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 2022 gets underway, investors are concerned about the Omicron variant of COVID-19, yet markets are taking developments in stride, with higher stock prices and bond yields. Is this economic confidence misplaced?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, January 5th at 10:00 a.m. in New York. As we settle in for 2022, the early line of questioning from clients regards the impact of the Omicron variant of COVID 19. It's been shattering records for infections globally and in the US, disrupting air travel as workers stay home sick. So why then are markets so far this week taking this in stride? Higher stock prices and bond yields reflect more economic confidence than concern. Is that confidence misplaced? Not necessarily, in our view. That's because while Omicron is clearly a serious public health risk, the data suggests it may not trigger the level of public policy response that sustainably crimps economic activity, such as indoor capacity restrictions on service establishments or stay at home orders. Since the pandemic's onset, such responses have largely been dictated by state and local governments, and as we pointed out in this podcast a month ago, in most cases where restrictions were tightened, rising COVID hospitalizations and lack of bed capacity were cited as the culprit. So far, the data suggests hospital capacity may not be a problem with Omicron. Consider studies from the UK and South Africa, which have shown that Omicron is substantially less likely than the previously dominant Delta variant to land people in the hospital. This likelihood is lessened even more if an infected person was previously vaccinated. So even as case counts soar above those prior waves, it's not surprising to see that measures of hospital capacity stress across the US are yet to exceed those of prior waves. Further, as our colleagues in the Biotech Research team point out, the contagiousness of Omicron and subsequent protection against reinfection that the infected develop, at least for a time, has led to bigger but shorter infection waves in places like South Africa. This is why US government officials point out that Omicron could peak and fall quickly sometime this month. In short, the wave and any attendant economic risk could be over quickly, and this may be why investors are looking through it. Hence, we expect markets will refocus on inflation and Fed policy as key drivers for 2022, continuing to push bond yields higher this year in line with our team's forecast. 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 Omicron variant spreads across Asia, renewed lockdowns and other earnings outlook disruptions have investors on alert, reinforcing our approach of cautious patience in the region.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of Omicron on China and Emerging Market Equities. It's Tuesday, January the 4th at 7:30 a.m. in Hong Kong. As 2022 begins, our approach to Asia and EM equities remains one of cautious patience. Although these markets underperformed their peers in the U.S. and Europe last year, simple arguments of performance mean reversion in 2022 are not strong enough to warrant anything more aggressive at this juncture. We hear a lot these days about a turn in the Chinese policy cycle as a catalyst. And it's fair to say that historically one would have been more optimistic at this juncture of the monetary and fiscal cycle for the outlook for domestic demand in China. This demand is crucial both for China's own growth outlook to stabilize, as well as to give a boost to most other markets in Asia and EM. But this is not a normal cycle. China's ‘zero COVID’ approach must now face off against Omicron. As this episode is being recorded, Xian - a major Chinese city with a population of over 13 million - is in its 12th day of a lockdown, which is now more severe in terms of restrictions on normal daily life than any seen in China since the original lockdown of Wuhan at the start of the pandemic. Two global companies with major semiconductor plants in the city have recently warned of production problems. And though there's no formal national policy to curtail celebration of Chinese New Year at the end of this month, domestic media is already beginning to broadcast a message of staying at home and avoiding long distance travel. In China, as in EM, we're continuing to track earnings estimates that are declining, which undermines the case for valuations - now roughly in line with long run averages - being sufficiently attractive to reengage. The situation is slightly better in Japan, where estimates are tracking sideways and individual markets - notably India and parts of Asean and Eastern Europe, Mid East and Africa - have been doing better than the EM overall. However, disruption caused by Omicron could change individual economic and hence earnings outlooks over the short to medium term. For example, India's most recent COVID case count was up 35% day-on-day, with Omicron now present in 23 of 28 states. Maharashtra, Delhi and Tamil Nadu have reimposed restrictions on visits to public parks, beaches and other public spaces. Indeed, most of the countries we cover that had moved to a "living with COVID" approach are now having to reverse course. Take South Korea, which in mid-December, as ICU usage rose significantly, reimposed early closing restrictions on nightlife and a rule limiting public gatherings to no more than four fully vaccinated persons. Finally, our weekly track of flows to dedicated Asia and EM equity funds is now showing steady and persistent redemptions, as some of the very large inflows from this time a year ago start to reverse course. Those flows were driven by the notion that a strong, synchronized upswing was underway globally, which it was argued would lead to outperformance by Asia and EM, whose economies generally perform strongly in a global economic upswing. We argued at the time that 2021 would not be like 2006/07 and 2016/17 when that narrative did hold true. As 2022 begins, the global and local economic outlook is clearly weakening again, and hence our mantra of continued cautious patience. 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.

With a new calendar year, the narrative in markets may not be shifting but there are still opportunities for investors to consider as growth rates, policy proposals, and interest rates shift in the coming year.----- Transcript -----Welcome to Thoughts on the Market and Happy New Year! 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 3rd at 11:30 a.m. in New York. So let's get after it. A new year brings new investment opportunities, even if the narrative isn't changing. More specifically, tightening monetary policy and decelerating growth supports our large cap defensive quality bias - a strategy that has worked well since we first started recommending it back in mid-November. On the first score, the Fed and other central banks appear to be determined to remove monetary accommodation in the face of higher inflation. Not only is inflation turning out to be an economic issue, but it's quickly becoming a political one given this is a midterm election year. What this means is the Fed will likely turn out to be more hawkish than investors expect, and that hawkishness is likely to be front-end loaded so markets have time to recover by November. As for the second part of the narrative, we think growth will decelerate this year as most of our leading indicators point to that outcome. Furthermore, this dynamic should be supportive of defensives outperforming cyclicals amid large cap quality leadership. This week, we expand our analysis to the industry level and illustrate that within defensives, Health Care, REITS and Consumer Staples tend to be the best performers in a decelerating but positive growth regime. As we reflect on 2021's strong performance from large cap U.S. equity indices last year, it's hard to get too excited about any remaining upside this year. Having said that, most individual stocks have gone nowhere since March, with many in a deep bear market. In many ways, 2021 looked a lot like 2018 - a year of rolling corrections and rotations as investors continually sought out higher ground in the high-quality S&P 500 index. As we enter 2022, the key question for investors is to decide if they want to stay with the relative winners, or is it time to go bottom fishing? New calendar years tend to support the latter strategy as the pressure of keeping up with the index eases. Hence, the new opportunities for investors. While we continue to favor the large cap defensive tilt that has been working, we recommend creating a barbell with stocks that have already corrected but still offer good prospects at a reasonable valuation. Over the past nine months, the quality bias has driven more and more money into a handful of large cap growth stocks - further highlighting the importance of favoring large over small since March. But as we already noted, this crowding has left many smaller stocks behind. A few areas we think make sense to consider include consumer services and other businesses with pent up demand. In the more growth-y segments, we think biotech and China Internet are good bottom fishing candidates. Meanwhile, we would still be careful with very expensive tech stocks that remain unprofitable. One final development to watch closely is long term interest rates. With a significant move higher in inflation and the Fed's pivot on policy, we think long term interest rates look too low. The sharp move higher today looks like the beginning of something more meaningful, and it could lead to new 52-week highs in short order if our technical view is correct. As such, we remain positive on financials as our sole cyclical overweight. A backup in rates is the reason, and that could be happening now. Bottom line, stick with a large cap defensive quality bias as we enter 2022, but balance it with financials and small mid-cap value stocks, particularly with the Fed and other central banks tightening policy faster than investors expect and rates likely back up. 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.

Original Release on August 24th, 2021: Recent developments in space travel may be setting the stage for a striking new era of tech investment. Are investors paying attention?----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays! Adam Jonas Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Space and Global Auto & Shared Mobility teams. With the help of my research colleagues across asset classes and regions, I try to connect ideas and relationships across the Morgan Stanley platform to bring you insights that help you think outside the screen. Today, I'll be talking about the Apollo Effect and the arrival of a new space race. It's Tuesday, August 24th, at 10:00 a.m. in New York. In May of 1961, President John F. Kennedy announced America's plan to send a man to the moon and bring him back safely to Earth before the end of the decade. This audacious goal set in motion one of the most explosive periods of technological innovation in history. The achievements transcended the politics and Cold War machinations of the time and represented what many still see today as a defining milestone of human achievement. In its wake, millions of second graders wanted to become astronauts, our math and science programs flourished, and almost every example of advanced technology today can trace its roots in some way back to those lunar missions. The ultimate innovation catalyst: the Apollo Effect. 60 years after JFK's famous proclamation, we once again need to draw on the spirit of Apollo to address today's formidable global challenges and to deliver the solutions that improve our world for generations to come. The first space race had clear underpinnings of the Cold War between the U.S. and the Soviet Union. Today's space race is getting increased visibility due to a confluence of profound technological change, accelerated capital formation - fueled by the SPAC phenomenon - and private space flight missions from the likes of Richard Branson and Jeff Bezos. We think space tourism is the ultimate advertisement for the realities and the possibilities of Space livestreamed to the broadest audience. The message to our listeners is: get ready. This stuff is really happening. Talking about Space before the rollout of the SpaceX Starship mated to a Super Heavy booster is akin to talking about the Internet before Google Search, or talking about the auto industry before the Model T. We are entering an exciting new era of space exploration, one that involves the hand of government and private enterprises - from traditional aerospace companies to audacious new startups. This race is driven by commerce and national rivalry. And the relevance for markets and investors, while seemingly nuanced at first, will become increasingly clear to a wide range of industries and enterprises. The Morgan Stanley Space team divides the space economy into 3 principal domains: communications, transportation and earth observation. Our team forecasts the global space economy to surpass $1T by the year 2040. And at the rate things are going, it may eclipse this level far earlier. When I first started publishing on the future of the global space economy with my Morgan Stanley research colleagues back in 2017, very few people seemed to care, and even fewer thought it was material for the stock market. I would regularly ask my clients "on a scale of 0 to 10, how important is space to your investment process?" And by far the most common answer I received was 0 out of 10. A lot of folks said 0.0 out of 10, just to make the point. Not even four years later and, oh my goodness, how things have changed. The investment community and the general public are rapidly embracing the genre and becoming aware of its importance economically and strategically. So whatever your own area of market expertise, this next era of space exploration and the innovation and commerce that spawn from it, will matter to your work, and to your life. But beyond the national competition, the triumph, the glory, the failures and the many hundreds of billions of dollars that'll be spent on launches, missions and infrastructure - is a reminder of something far bigger that we learned over a half a century ago during the Apollo era - that Space is one of the greatest monuments of human achievement, and a unifying force for the planet. Thanks for listening. And remember, 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.

Original Release on September 30th, 2021: Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, discusses the new shape of retail investing and the impact on markets.----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays!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 today on the podcast, we'll be discussing the retail investing landscape and the impact on markets. It's Thursday, September 30th, at 2p.m. in London.Lisa Shalett And it's 9:00 a.m. here in New York City.Andrew Sheets Lisa, I wanted to have you on today because the advice from our wealth management division is geared towards individual investors, what we often call retail clients instead of institutional investors. You tend to take a longer-term perspective. As chief investment officer, you're juggling the roles of market analyst, client adviser and team manager ultimately to help clients with their asset allocation and portfolio construction.Andrew Sheets Just to take a step back here, can you just give us some context of the level of assets that Morgan Stanley Wealth Management manages and what insight that gives you potentially into different markets?Lisa Shalett Sure. The wealth management business, especially after the most recent acquisition of E-Trade, oversees more than four trillion dollars in assets under management, which gives us a really extraordinary view over the private wealth landscape.Andrew Sheets That’s a pretty significant stock of the market there we have to look at. I'd love to start with what you're hearing right now. How are private investors repositioning portfolios and thinking about current market conditions?Lisa Shalett The individual investor has been important in terms of the role that they're playing in markets over the last several years as we've come out of the pandemic. What we've seen is actually pretty enthusiastic participation in markets over the last 18 months with folks, you know, moving, towards their maximum weightings in equities. Really, I think over the last two to three months, we've begun to see some profit taking. And that motivation for some of that profit taking has kind of come in two forms. One is folks beginning to become concerned that valuations are frothy, that perhaps the Federal Reserve's level of accommodation is going to wane and, quite frankly, that markets are up a lot. The second motivation is obviously concern about potential changes in the U.S. tax code. Our clients, the vast majority of whom manage their wealth in taxable accounts, even though there is a lot of retirement savings, many of them are pretty aggressive about managing their annual tax bill. And so, with uncertainty about whether or not cap gains taxes are going to go up in in 2022, we have seen some tax management activity that has made them a little bit more defensive in their positioning, you know, reducing some equity weights over the last couple of weeks. Importantly, our clients, I think, are different and have moved in a different direction than what we might call overall retail flow where flows into ETFs and mutual funds, as you and your team have noted, has continued to be quite robust over, you know, the last three months. Andrew Sheets So, Lisa, that's something I'd actually like to dig into in more detail, because I think one of the biggest debates we're having in the market right now is the debate over whether it's more accurate to say there's a lot of cash on the sidelines, so to speak, that investors are still overly cautious, they have money that can be put into the market. You know, kind of versus this idea that markets are up a lot, a lot of money has already flowed in and actually investors are pretty fully invested. So, you know, as you think of the backdrop, how do you think about that debate and how do you think people should be thinking about some of the statistics they might be hearing?Lisa Shalett So our perspective is, and we do monitor this on a month-to-month basis has been that, you know, somewhere in the June/July time frame, you know, we saw, our clients kind of at maximum exposures to the equity market. We saw overall cash levels, had really come down. And it's only been in the last two to three weeks that we've begun to see, cash levels rebuilding. I do think that that's somewhat at odds with this thesis that there's so much more cash on the sidelines. I mean, one piece of data that we have been monitoring is margin debt and among retail individual investors, we've started to see margin debt, you know, start to creep up. And that's another indication to us that perhaps this idea that there's tons of cas

Original Release on August 12th, 2021: Investor interest in thematic equity products such as ETFs has rapidly surged, particularly among tech themes. Why the momentum may only grow.----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays!Graham Secker Welcome to Thoughts on the Market. I'm Graham Secker, Head of the European and UK Equity Strategy Team.Ed Stanley And I'm Ed Stanley, Head of European Thematic Research.Graham Secker And today on the podcast, we'll be talking about the continued interest in thematic investing in Europe. It's Thursday, August the 12th, at 3 p.m. in London.Graham Secker So, Ed, I really wanted to talk to you today because investor appetite for thematic related equity products such as ETFs, mutual funds and the like has grown to the point that thematics has actually been carved out from our traditional sector research at Morgan Stanley. So as head of the European Thematic Investing team, can you walk us through what's behind the increased interest in this area and how you see the thematic landscape evolving over the next couple of years?Ed Stanley Thanks, Graham. To understand thematics, first you have to look at the geographies. And when you do that, it's really a two-horse race. Of the $450 billion in global thematic mutual funds in June this year, 60% of that was in Europe. So the lion's share. And then there's the U.S., which is the second largest geography for thematic investing, but growing very quickly indeed. If you look in the US year to date, for example, there have been over 100 thematic ETF launches-- comfortably double the run rate of thematic starts in 2020. Once you've looked at geography, then you have to look at the landscape by theme. And this is where thematic investing gets really interesting. The breadth of and growth in thematic strategies is truly extraordinary. Fund starts are compounding over 40% over the last three years and inflows for those funds have seen high double digit, and even triple digit growth, so far this year. Most obviously, themes like genomics and eSports fall into that high growth category. We even saw a dedicated ETF launch in June this year, particularly trying to gain exposure to the metaverse, which is the first of its kind. So while we don't make explicit forecasts on where we think thematic investing is going to be in a one year view, the momentum is showing no signs of slowing down. In fact, quite the opposite.Graham Secker So with any number of themes to choose from, the world really is your oyster, I think. So how do you whittle down or cherry pick where you spend your time?Ed Stanley It's a great question and that's really my number one challenge. While we're never short of ideas, determining which theme is the zeitgeist of the day is absolutely critical. And to do that, our thematic research really hinges on two streams of analysis. On the one hand, demographic change and on the other, disruptive innovation. We believe that these two groupings and the subthemes therein hold the key to shifting future consumption patterns, which ultimately all investors need to be conscious of. But with that said, for most investors to be interested in a theme, it needs to be actionable within at least three to five years. Consequently, for a theme to work, investors need a relatively near-term catalyst. So when we're looking within disruptive innovation, for example, we need to think what's the catalyst to make investors care about this theme? Be that a product launch, start-up funding, falling technology costs, regulation or government policy. When you can twin up an interesting thematic idea with a catalyst, that's really where we focus our attention.Graham Secker Another question I want to ask is, how do you test the pulse of the market to determine what is a live thematic debate and where you think investors may be too early or late to a theme?Ed Stanley Well, I suppose this really narrows down the previous point. So we now have our theme, so to speak. We have to ask ourselves, does the market already care about this theme or will the market care in the not-too-distant future? And this is where we think we've come up with a relatively interesting and novel solution to screen for that. Through a combination of four things: patent analysis, capital spending patterns by companies, the velocity of comments made by company management teams and finally, using Google Trends momentum data, we believe that we can relatively accurately pick which themes are either gathering momentum or, on the flip side, those that may have been past their initial peak of excitement.Graham Secker Okay. And on that point, what are some of the key themes you're watching right now?Ed Stanley Well, I suppose one that we can't ignore, particularly given my previous comments, is hydrogen. On all of the metr

Original Release on August 26th, 2021: Equity investors have applied factor-driven strategies for years, but the approach has seen slow adoption in bond markets. Here’s why that may be changing.----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays! Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley, Vishy Tirupattur And I am Vishy Tirupattur, Head of Fixed Income Research at Morgan Stanley. Andrew Sheets And on this special edition. And on this special edition of the podcast, we'll be talking about factor investing strategies and liquidity in corporate credit markets. It's Thursday, August 26th, at 3:00 p.m. in London Vishy Tirupattur And 10:00 a.m. in New York. Andrew Sheets So Vishy, before we start talking about factor investing and credit, we should probably talk about what is factor investing and why are we talking about it. So, what is this concept and why is it important? Vishy Tirupattur Factor investing whose intellectual roots are from a seminal paper from two University of Chicago professors in the early 90s, Eugene Fama and Ken French. It effectively is a way of identifying companies to invest using rules based systematic investing strategies, be it identifying quality, identifying value, identifying momentum or volatility or risk adjusted carry. A bunch of these strategies involve setting up a set of rules and systematically in following those rules to build a portfolio. And we've seen that these strategies in the context of equities have substantially outperformed more discretionary strategies. Andrew Sheets So you can kind of think about it as the Moneyball approach to investing, that you think over time doing certain types of things in certain situations over and over again systematically is going to ultimately deliver a better long run result. Vishy Tirupattur Exactly right. Andrew Sheets So you mentioned that this has been a strategy that's been around a long time in equity markets. Why hasn't it been around in credit? And what's changing there? Vishy Tirupattur The key for systematical rules-based investing strategies or factor investing is being an abundance of liquidity in the market. And the complexity of credit markets means that this has been a big challenge to implementing these types of strategies. For example, you know, S&P 500, not surprisingly, has 500 stocks. And underlying those 500 stocks are literally thousands of bonds that underlie those 500 stocks, that weigh in maturity, in coupon, in rating, in seniority, etc... Each of these introduces an element of complexity that just complicates the challenge associated with factor investing. Andrew Sheets So Vishy, that's a great point, because if I want to buy a stock, there's one stock, but if I want to buy a bond of that same company, there might be many of them with different maturities and different coupons. They're just not interchangeable, and that does introduce complexity. Vishy Tirupattur So one big thing that's happened is the advent of electronic trading. Electronic trading today accounts for almost a third of all trading in investment grade corporate credit and in over 20% of all trading in high yield corporate credit. This has made a significant difference and enables factor investing possible in the context of credit. Andrew Sheets So more electronic trading, more portfolio trading is improved liquidity and made certain types of factors, systematic strategies possible in credit. Are ETFs a part of this story? Obviously, those represent a portfolio of credit. We're seeing rising volumes within the credit market of exchange traded funds. How do you see that playing into this trend? And what do you think is the outlook there? Vishy Tirupattur Absolutely. ETFs constitute portfolio trades and portfolio trading indeed has become a very, very big part of trading here. Even five years ago, ETFs accounted for about 5% of all the traded volumes in investment grade and maybe about 20% in high yield. Today, they account for 16% of all traded volumes investment grade and 50% of all the traded volumes in high yield. So, ETF and portfolio trading in general has enabled not only greater liquidity, but smaller issue sizes and smaller issuers, and that's an important distinction. Andrew Sheets So how would this actually work in practice? You know, I could go out and I could just buy a credit fund that owns all the bonds in a particular market. Or I could try one of these factor strategies. What would the factory strategy actually be doing? I mean, what are the characteristics that our research suggests credit investors should be trying to favor versus avoid? Vishy Tirupattur Let me talk about two strategies. First is a ri

Recent signals from the Fed are indicative of a willingness to change its mind quickly. While bond investors may be wary of the volatility this could bring, it may also create opportunities in the new year.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, December 22nd at 10:00 a.m. in New York. While investors may be focused on the gridlock on the Build Back Better fiscal plan, we think it makes sense to shift our focus from Capitol Hill to the Federal Reserve, which just made a big move, and one that arguably matters more to markets in the near term than developments out of Congress. Last week, the Fed announced a more aggressive tapering of asset purchases. Perhaps more importantly, it signaled an expectation of hiking interest rates three times next year, rather than the two times most forecasters expected. In the press conference following the announcement, Chair Powell repeatedly signaled his intent was to demonstrate both that the Fed takes seriously the risk posed by a recent uptick in inflation, as well as the flexibility of the Fed's monetary policy, by discussing his willingness to adjust the taper and rate hike outlooks as data comes in. This last point is an important one for bond markets. In dealing with substantial uncertainty around the inflation outlook, you have a Fed that elected a pragmatic approach - a willingness to change its mind quickly as it sees fit. That's not a novel approach, but it may be fresh to many investors today who may be more accustomed to the slower, more deliberate approach that economic conditions pressed the Fed to take under its previous two chairs. But such an approach means it's harder to predict with confidence what will happen next to monetary rates. That uncertainty means more disagreement among investors, which in turn means more sustained volatility in the Treasury market. That's not necessarily bad news for investors, though. In our view, it actually may lead to some interesting opportunities in 2022 for credit investors. In the muni market, for example, elevated rates volatility has, more often than not, caused market weakness as investors shy away from price uncertainty in an asset class they generally want to own for reasons of capital preservation and asset allocation. But muni credit quality, in our view, is likely to remain quite strong in 2022, with continued strong economic growth allowing municipal entities to lock in their credit gains from government aid and a sharp GDP recovery in 2020 and 2021. So, if volatility leads to price weakness, we're likely to see this as an opportunity to add good credit, just at a cheaper valuation. So, beware the Fed and volatility, but don't fear it. We'll keep you updated here for the opportunities it may create. Happy holidays from all of us here at Thoughts on the Market. We'll be back in the new year with more episodes. And 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.

With shifting focus across regulatory, monetary and fiscal policy, there is renewed confidence in the growth and recovery outlook for China in 2022.----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Chief Asia Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives. I'll be talking about the prospects for China's recovery amid regulatory, monetary and fiscal policy easing. It's Tuesday, December 21st at 7:00 p.m. in Hong Kong. China's policy stance is clearly shifting from over-tightening to easing, and with it, we think the cycle is also turning from a mini downturn to an upswing. We are more bullish than the consensus and see GDP growth accelerating to 5.5% in 2022. Over the years, China has experienced a number of mini cycles. These mini cycles in growth tend to follow the policy cycles. While tightening starts out as countercyclical, it eventually becomes pro-cyclical, and sometimes because external demand conditions deteriorate - for example, the onset of trade tensions in mid-2018. Once growth decelerates beyond policymakers' comfort zone, their priorities shift to stabilizing growth and preventing an adverse spillover impact into the labor market. In the current cycle, with sharp pick-up in external demand, policymakers stuck to their playbook and tightened macro policies to slow infrastructure and property spending. But from the summer of this year, as Delta wave-led restrictions weighed further on consumption growth, continued policy tightening pushed growth lower than policymakers' comfort zone. This time around, policy tightening was unusually aggressive, leading to a 10 percentage point drop in debt to GDP in 2021. Indeed, we have not seen this magnitude of debt to GDP reduction in a year since 2003-07 cycle. Moreover, the rapid succession of regulatory tightening actions related to the tech sector and decarbonization has taken markets by surprise, adding uncertainty and keeping market concerns on the boil. Now, with GDP growth decelerating to just 3.3% on a year-on-year basis in 4Q21, which would be 4.9% adjusted for high base effect, policymakers have hit pause on deleveraging and began to ease both monetary and fiscal policy a few weeks ago. Bank reserve requirement ratio cuts were coupled with guidance to banks to allocate more credit to priority sectors. At the same time, local government bond issuance has increased significantly, which in turn will translate into stronger infrastructure spending. And several local governments have also lifted property purchase restrictions. Two Fridays ago, policymakers convened at the Central Economic Working Conference - an annual meeting that sets the agenda for the economy in the year ahead - and the resulting statement suggested to us that there is a clear shift in policy stance, and they will continue to take action in a number of areas to stem the downturn, increasing our confidence in China's recovery. These policy easing measures will complement the sustained strength in exports and a pickup in private capex, driving the recovery. And in terms of market implications, our China Equity Strategy team continues to prefer A-shares rather than offshore markets, and our China Property and Asia Credit Strategy analysts are optimistic on the China property sector as well as China high yield property. The key risk to our call in the near-term is the Omicron variant. The effectiveness of China's containment and tracing capabilities has improved over time, such that each successive wave of COVID outbreaks has had a smaller impact on mobility and growth. However, Omicron's greater transmissibility suggests to us that it will keep China's COVID zero policy in place for longer and potentially force China to impose more selective lockdowns than during the Delta wave. 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 a colleague today.

Our narrative of tightening monetary policy and decelerating growth continues to play out amidst developments in Omicron, failed legislation and signals from the Fed.----- 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, December 20th at 11:30 a.m. in New York. So let's get after it. Our Fire and Ice narrative for tightening monetary policy and decelerating growth is playing out, with the central banks taking aggressive steps to deal with the higher-than-expected inflation. Meanwhile, Omicron and the failure to pass President Biden's Build Back Better bill have awakened investors to the risk of slower growth that we think is as much about the ongoing cyclical downturn as these external shocks. In short, stay defensive with your equity positioning. First, with the Fed preparing investors over the past four months for what could be a very long process of removing monetary accommodation from markets that have become dependent on it, the most expensive and speculative stocks have already been hit exceptionally hard. Furthermore, the quality trade has taken on a more defensive posture. Both of these shifts are very much in line with our 2022 outlook - be wary of high valuations and focus on earnings stability. In other words, favor large cap defensive quality. Second, with the market and the Fed now fully appreciating that inflation is not going to be transitory, investors must contend with the Ice part of our narrative. How much further will growth decelerate, and how much is due to Omicron versus the ongoing cyclical downturn that began in April? As noted in prior episodes of this podcast, we remain optimistic that this latest wave will prove to be the last notable one. Meanwhile, the peak rate of change in the recovery was way back in April of this year. Since then, we've seen a steady deceleration in growth that has little to do with COVID, in our view. Instead, this is the natural ebb of the business cycle and mid-cycle transition, which is not yet complete. Of course, this latest variant will be a drag on certain parts of the economy and perhaps bring forward the end of the mid-cycle transition more quickly. Finally, this past weekend Senator Manchin effectively put an end to the president's latest fiscal stimulus plan - another negative for growth in the near term. All of these developments fit nicely with our year ahead outlook for U.S. equities. Therefore, we continue to think most stocks will see valuations come down as central banks remove monetary accommodation and growth slows more than investors expect. Favor defensively oriented stocks over cyclical ones. This includes Healthcare, REITs and Consumer Staples. Meanwhile, consumer discretionary and certain technology stocks look to be the most vulnerable as we experience a payback in demand from this year's overconsumption. While other cyclical areas like energy, materials and industrials could also underperform, ownership of these sectors is not nearly as extreme as the discretionary and tech, nor are they as expensive. Finally, while major U.S. equity indices remain vulnerable, in our view, many individual stocks have been in a bear market for most of the year. As a reminder, almost 80% of all stocks in the Russell 2000 have seen a 20% drawdown during 2021. For the Nasdaq, it's close to 60%, while 40% of the S&P 500 has corrected by 20% or more. In our view, it makes sense to look for new investments in stocks that have already corrected, rather than the ones that have held up the best. We would recommend a barbell of these kinds of stocks with the more classic large cap defensive names that fit our current macro view. 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.

A quick preview of what you'll hear on the Thoughts On The Market podcast, which features short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

With recent signals from the Federal Reserve and new data on the Omicron variant, there’s a lot that could impact the shape of 2022, but for now the core of our outlook remains unchanged.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley. Along with my colleagues, bring 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, December 17th, at 2 p.m. in London.Every year, the economists and strategists at Morgan Stanley come together and try to forecast what the next year could look like. And then, as always seems to be the case, something happens. The world, after all, is an unpredictable place.This year, these 'somethings' have come thick and fast. As my colleague Matthew Harrison, U.S. biotechnology analyst, and I discussed on this program last week, the Omicron variant appears to be highly contagious and likely to lead to a large wave of winter infections.At almost the same time, the US Federal Reserve, arguably the world's most important central bank, has been sounding less tolerant of inflation, leading Morgan Stanley's economists to now expect a quicker end to the central bank's bond purchases and also a larger, faster increase in Federal Reserve interest rates relative to what we thought just a month ago.Both are major developments. But while they change some of our investment strategy around the edges, we don't think, for now, they change the main story for 2022.To understand why, let's start with the Federal Reserve. Yes, the Fed is now likely to end bond purchases and raise interest rates sooner than we had previously assumed. But from an investment perspective, we always thought the central bank would signal an intent to be less supportive to start the new year, hoping to convince markets that they were taking inflation seriously. We had previously thought that this 'tough talk' might shift in the spring, when inflation data would come down, and the Fed wouldn't ultimately follow through on interest rate hikes. But now, it looks like they will.But in either scenario, the strategy for investors should be to position for a central bank that is indicating it wants to be less supportive. As such, we expect interest rates to move higher, especially around five-year maturities, the dollar to appreciate and U.S. and emerging markets stocks to underperform those in Europe and Japan, where the central banks are going to be more accommodating for longer. We think financials outperform as an equity sector, seeing them as a beneficiary of less central bank accommodation.The other development, of course, is Omicron, while the new variant appears to be highly contagious. Our economists at Morgan Stanley had always assumed some form of a 'winter wave' of COVID in their growth numbers, given the virus's seasonal characteristics. Economic data, for the moment, has actually held up quite well and global activity has been less impacted by each incremental COVID wave. And we also need to consider the entire year, not just what could be a very difficult month or two of high COVID cases. All of these together are why our base case remains for strong global growth in the next year, despite the currently worrying headlines.Both new developments, however, require close observation. The Fed looks much more willing to shift in either direction than it has before, while the full impact of Omicron may not be seen for several more weeks. For now, however, we think a backdrop of good global growth and less central bank support remains the outlook for 2022.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.

The last week brought new evidence regarding the transmissibility, immune evasion and disease severity of Omicron, and with it, more clarity on the coming weeks and months.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Harrison, Biotechnology Analyst. Along with my colleagues, bringing you a variety of perspectives, today I'll be discussing our updated thoughts on the COVID 19 pandemic and the impact of Omicron. It's Thursday, December 16th at 10:00 a.m. in New York. Since Omicron was first discovered, we've been using the framework of transmissibility, immune evasion and disease severity to think about its impact. Over the last week, the level of evidence on all three topics has increased significantly. So first, on transmissibility. The ability of Omicron to outcompete the prior dominant variant, Delta, now appears clear. We have evidence in South Africa, the UK and Denmark, with Omicron now dominant in central London and set to be the dominant variant in the UK over the next few days. The US is a few weeks behind Europe in terms of spread, but we would expect a similar pattern. Cases are now rising globally, driven by Omicron's transmissibility. This is a combination of factors driven by one, its innate transmissibility, and second, its immune evasion properties, which have dramatically increased the percentage of the population susceptible to infection. We now have multiple studies, which generally come to a similar conclusion. Two doses of vaccination or a single prior infection provide little to no barrier against infection. Two doses of vaccination do, however, provide protection against severe outcomes like hospitalization or death. This is around a 70% relative reduction versus those who are not vaccinated based on preliminary data. Three doses of vaccination or two doses of vaccination and a prior infection provide a greater barrier against infection. Preliminary data here suggests a 75% relative reduction to those without three doses or two doses and a prior infection. Importantly, since a limited proportion of the population has been boosted - we estimate at about mid-teens percentage of the total US population - the vast majority of the population is again susceptible to an infection with Omicron. And finally, on disease severity. The data out of South Africa continue to suggest the percentage of patients with severe outcomes is lower relative to the prior Delta wave. This means that there are less people in the ICU and less people on a ventilator as a proportion of the total people infected compared with Delta. That said, it's important to remember that even with a lower proportion of people having severe disease, if Omicron drives a wave of infections that is much higher than Delta, the overall disease burden could still be very high. So this leads us to what is our outlook on infections and the ultimate impact of Omicron. The variant is likely to be dominant quickly, and we would expect to be in the steeper part of the exponential rise in cases here in the US in the next two to three weeks. We believe it is possible that the Omicron wave could have a peak in terms of total number of infections that is somewhere between 2 and 3 times higher than the prior Delta wave. However importantly, vaccination should help protect against severe outcomes. For more on Omicron, we also recently sat down for an interview with the Moderna CEO Stephane Bancel to discuss his views on that topic and more. You can see the full interview on MorganStanley.com. Thanks for listening! We hope you have a safe and enjoyable holiday season. If you enjoy Thoughts on the Market, please be sure to rate and review us on the Apple Podcast app. It helps more people find the show.

While many are hopeful for an easing of supply chain delays in 2022, the resolution of these issues may lead to new challenges and opportunities in key stock sectors investors should be watching.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, December 15th at 10:00 a.m. in New York. Inflation is a hot topic in Washington, D.C. The president talks about it regularly in his Twitter feed and on camera. It's also a favorite concern of Senator Manchin, who openly ponders whether inflation concerns will keep him from casting the deciding vote on the Build Back Better plan. Yet for investors, inflation has always been a necessary obsession, as its presence or lack thereof, typically drives impacts in the bond and foreign exchange markets. But today we want to focus not on the potential effects of inflation, but one of its causes - namely supply chain issues and how the resolution creates challenges and opportunities in some key stock sectors. But let's start with the why of supply chain issues. Why are the reports of shortages, ships waiting at ports to deliver goods, and rising prices because of the scarcity it creates? In short, it has to do with the extraordinary impact of the pandemic. Social distancing initially drove sharp but short-lived declines in consumer demand and companies' consumer demand expectations. But substantial fiscal aid to the economy led to a rebound in economic activity. Yet this was mostly focused on goods over services as COVID concerns continued to crimp the demand for activities, like eating out. This led to some abnormal and astonishing data. For example, personal consumption of durable goods declined 20% in the early days of the pandemic, more than 10x the decline from the prior recession. Yet by this past October, consumption of durable goods was 40% higher than pre-COVID. It's no wonder that container shipping rates from Shanghai to Los Angeles are 5x their normal run rate. Yet our colleagues see these pressures starting to abate in the US. Vaccines appear to have eased concerns among the population in consuming services in public spaces and service consumption is now rising sharply, whereas goods consumption growth has leveled off. Our economists expect this will help ease the pace of inflation starting in the first quarter of next year. While this would be good news for the economy overall, the story could be more mixed across stock sectors. Our tech hardware team, for example, sees a period of weaker orders for semiconductors after customers receive their currently delayed orders. This dynamic could open the door for earnings disappointment. On the other hand, our Capital Goods team sees opportunity, as the current bottleneck may have persuaded a variety of industries that they need to invest in reinventing their supply chains and potentially engage in some re or near shoring, which would require substantial equipment and materials investment. So as we head into the end of the year, supply chain delays are likely to continue to raise concerns around inflation, but the first half of 2022 will be telling. We'll keep you updated as the story develops. 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.

Cryptocurrency companies have begun to act as banks in the US, and while regulators have expressed concerns over interest rates and the primacy of the dollar, this interplay has only just begun.----- Transcript -----Welcome to Thoughts on the Market. I'm Sheena Shah, Lead Cryptocurrency Analyst for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the escalating financialization of cryptocurrency markets. It's Tuesday, December 14th at 2:00 p.m. in London. BYOB - Be Your Own Bank. This has been the clarion call of Bitcoin evangelists since its very inception. But in an ironic turn of events, crypto companies Avanti, Anchorage and Kraken have all become banks in the US. Not in the sense espoused by bitcoin maximalists, but in the fiat - that is to say, government regulated sense. And regulators have shone much of their spotlight on the conspicuously outsized interest rates on offer to depositors through crypto lending. On the 10th of December, you could deposit a cryptocurrency called USDC with a company called BlockFi and receive an interest rate of 9%. Concern has arisen from the fact that the issuers of USDC aim to control its value, such that a single USDC should, in theory at least, always fetch a value of approximately one U.S. dollar. The disparity between a 9% rate on what is essentially a proxy for the dollar and the historically low rates on actual dollar deposits at retail banks, has regulators concerned about the emergence of a parallel banking system. The irony here is that it was preexisting banking regulation itself that played a hand in creating this high rate. Traditional banks have turned down crypto traders due to regulatory risk, and so these traders were forced to borrow from the crypto markets and offer lenders higher rates of return. Nevertheless, US regulators appear to be taking measures to limit competition with the dollar banking system. New Jersey regulators have ordered BlockFi to stop offering high interest crypto deposit accounts from February next year. And in September, the Securities and Exchange Commission sent Coinbase a Wells notice, following which Coinbase aborted a plan to offer 4% interest on USDC deposits. Ultimately, regulators will have to decide how aggressively they want to safeguard the primacy of the dollar. They could stymie much of the industry to be sure or hope the dollar stands up to scrutiny in order to allow the crypto industry to grow. The longer they wait, the higher the risk. Following multi-trillion stimulus packages and over a decade of quantitative easing, the dollar has been left as open to competitors as it has been since the Bretton Woods agreement in 1944. Investors should keep an eye on the direction that regulators take in the face of this and the broad spectrum of outcomes those regulations might portend for crypto valuations, ranging anywhere from new highs to the old lows of bygone price cycles. The meeting of crypto culture and traditional banking regulation is a seminal moment for the crypto industry. I, for one, am excited to see how this interplay evolves. Crypto companies are becoming more like banks, just as traditional banks have themselves begun to offer crypto products. Thanks for listening! If you enjoy Thoughts on the Market, share this and other episodes with a friend or colleague today.

Our 2022 outlook presented a wider than normal range of potential paths. While our base case still appears likely, shifts in supply and Fed policy could cause a change in course.----- 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, December 13th at 11:30 a.m. in New York. So let's get after it. In writing our year ahead outlook, we were faced with what we think is a wider than normal range of potential economic and policy outcomes. This higher "uncertainty" was one of the inputs to our key conclusion - that valuations for U.S. equity markets were likely to come down over the next 3-6 months. In our discussions with hundreds of clients since publishing our outlook, the conversations have centered on these three potential outcomes and how to handicap them. First is Goldilocks. When we published our outlook on November 15th, this was the prevailing view by most clients. In this outcome, supply picks up in Q1 to meet the excess demand companies are having a hard time fulfilling. Inflation has a relatively fast but soft landing towards 2-3%, which allows for growth to remain strong and multiples to remain high. The S&P 500 reaches 5000 by year end 2022. And this was our bull case in our outlook with a 20% probability. In the second outcome, inflation remains hot and the Fed responds more aggressively. Under this outcome, inflation proves to be stickier as supply chains and labor shortages remain difficult to fix in the short term. The Fed is forced to taper faster and even raise rates on a more aggressive path. This was our base case, as it essentially lined up with our hotter but shorter cycle view we first wrote about back in March. At the same time, operating leverage fades as costs increase more in line with revenues. This leaves market breadth narrow in the near-term as valuations fully normalize in line with the typical mid-cycle transition. While there is some debate around how much P/Es need to fall, we believe 18x is the right number to use for year-end 2022. When combined with 10% earnings growth, that gives us a slight downside to the index from current prices, or 4400 on the S&P 500. We put a 60% probability on this outcome. The third outcome assumes supply ticks up, but demand fades. Under this scenario, we assume supply comes too late to meet what has been an unsustainable level of consumption for many goods. It's also too expensive for customers who have become wary of higher prices, which leads to demand destruction for many areas of the economy. While services should fare better and keep the economy growing, goods producing companies suffer. Under this scenario, the Fed may back off on their more aggressive tightening path. Rates fall, but not enough to offset the negative impact on margins and earnings, which will end up disappointing. This is essentially the "Ice" part of our Fire and Ice narrative turning out to be chillier. Equity risk premiums soar and multiples fall more than under our base case. This was our bear case with a 20% probability. Since publishing, we feel more confident about our base case being the most likely outcome. Inflation data continues to come in hot and companies are having little problem passing it along, for now. While this will likely lead to another good quarter of earnings, we suspect there will be more casualties too, as execution risk is increasing. This will leave dispersion high and leadership inconsistent - two more conclusions in our outlook. Stock picking will be difficult, but a necessary condition to generate meaningful returns in 2022 as the market index is flat to down over the next 12 months. This is a big week on policy outcomes, with the Fed likely to announce a more aggressive timeline for tapering its asset purchases. In short, we expect the Fed to tell us that they will end its asset purchase program by March 31st. While our base case always assumed the Fed would respond appropriately to higher inflation, this is a more aggressive pivot than what we expected a month ago. Importantly, the Fed is now suggesting stable prices are important to achieving its primary goal of full employment, which means inflation is taking center stage until it's under control. Finally, we think Jay Powell and the Fed will be under much less pressure from the White House versus the last time they were aggressively removing monetary accommodation in late 2018. Part of this is due to the fact that inflation is a much bigger problem today than it was in 2018, and part of it is due to the observation that the White House today is not as preoccupied with the stock market. Bottom line, the Fed is determined to bring down inflation, and falling stock prices are unlikely to stop them from trying.&

With recent central bank action raising questions on monetary policy, Global Head of Macro Strategy Matthew Hornbach takes us through the implications for the trajectory of rates and currency markets in the year ahead.----- Transcript -----Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the 2022 outlook for rates and currency markets. It's Friday, December 10th at 10:00 a.m. in New York. Every November my colleagues within research come together to discuss the year ahead outlook. And almost every year something happens in the month after we publish our forecast that changes one or more of our views. This year, several Morgan Stanley economists have changed their calls on central bank policies given higher than expected inflation and shifting central bank reaction functions. Our monetary policy projections have become more hawkish for central banks in emerging markets, mostly. But earlier this week, our projection for Federal Reserve policy became more hawkish as well. Our economists now see the Fed raising rates twice next year, whereas before they didn't see the Fed raising rates at all. Does this change alter our view on how macro markets will move next year? Well, it doesn't change our view on the direction of markets. We still think U.S. Treasury yields will rise and the U.S. dollar will strengthen in the first half of the year. But now we see a flatter U.S. yield curve and the U.S. dollar performing better than before. What hasn't changed in our outlook? We still see macro markets dealing with variable central bank policies in 2022. Some policies will be aimed at outright tightening financial conditions, such as in the UK, Canada, New Zealand and now the U.S. Other central banks will attempt to ease financial conditions further, albeit at a slower pace than before, like the European Central Bank. And some will aim to maintain accommodative financial conditions like the Reserve Bank of Australia and the Bank of Japan. For rates markets, we expect yields around the developed world to move higher over the forecast horizon, but only moderately so. And while we see real yields leading the charge, we don't foresee a tantrum occurring next year. We forecast 10-year Treasury yields will end 2022 just above 2%. That would represent a similar increase to what we saw in 2021. As for the US dollar, we see two primary factors lifting it higher next year. First, we see a continued divergence between U.S. and European economic data. Recent U.S. economic strength should continue into the first half of the year. And expectations for future growth should stay elevated, assuming additional fiscal stimulus measures are approved by the U.S. Congress, in line with the Morgan Stanley base case. At the same time, our economists have been expecting data in Europe to weaken. In addition, the worrying surge in COVID cases and the government responses across Europe pose additional downside risks. To be clear, we expect eurozone growth to be strong over the full year of 2022, yet it is likely that the economic divergence between the U.S. and Europe continues for a while longer. This should keep the U.S. dollar appreciating against low yielding G10 currencies, such as the euro. We also expect further upside for the US dollar against the Japanese yen, driven by higher U.S. Treasury yields. The second factor arguing for a stronger US dollar is central bank policy divergence. The Fed could strike a more upbeat and hawkish tone throughout next year, just as it has done more recently. On the other hand, the risk for the ECB is that its more hawkish members adjust their views in a more dovish direction, and then the ECB delivers more accommodation than expected, not less. If the upcoming Fed and ECB meetings this December go as we expect, they would set up the dollar for additional strength in the first half of next year. As for higher yielding riskier currencies, we think four factors will support them. First, our economists forecast robust global growth next year. Second, they also forecast inflation will moderate from unusually high levels. Third, they see central banks maintaining abundant pools of global liquidity. And finally, we think this leads to only a moderate rise in real yields. As a result, we have constructive views on the risk sensitive G10 currencies. In particular, we expect the Canadian dollar and the Norwegian krona to outperform the US dollar and lead the G10 pack. We see buoyant energy prices and hawkish central bank policies keeping these currencies running ahead of the U.S. dollar and far ahead of the euro and the yen. 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.

The US economy is in a unique moment of uncertainty but headed into 2022, shifts in inflation, the labor market and Fed policy tell a constructive story.----- Transcript -----Ellen Zentner Welcome to Thoughts on the Market. I'm Ellen Zentner, Chief U.S. Economist for Morgan Stanley Research.Robert Rosener And I'm Robert Rosener, Senior U.S. Economist.Ellen Zentner And on this episode of the podcast, we'll be talking about the 2022 outlook for the U.S. economy. It's Thursday, December 9th at noon in New York.Robert Rosener So, Ellen, we're headed into 2022. We're in a pretty unique moment for the U.S. economy. We see rising inflation, supply chain issues and uncertainty about Fed policy. Of course, we also had disappointing job growth in the month of November, but unemployment that is now not far from pre-COVID lows. So we've got a lot of different indicators sending very different messages right now. How should listeners be thinking about the U.S. economy right now and what that means for the outlook into 2022?Ellen Zentner Yeah. So we're pretty constructive on the U.S. economy, and it may be surprising with all the uncertainties that you noted. You know, consumers are in very good shape. We've been talking about excess savings for a long time on these podcasts. Excess savings is still there as a cushion. Look, inflation is rising and continues to rise, but it's rising because demand is still strong. At the same time, we don't have enough goods of what people want to buy. So I don't think we're out of the woods yet for rising inflation. I think we're going to get some more prints here that are even higher. But we already are getting indications from our equity analysts that their companies are saying that their supply chains are easing. So I think, within just a matter of months, we should start to see inflation come down. And while households are telling us in our surveys that inflation worries them even more so than COVID, they're still spending. And we expect that as we move into next year, we're going to recoup some of that deferred demand from goods that are going to be available that weren't there before.Ellen Zentner But the other thing that's really important for consumer spending is the jobs numbers, and you mentioned that, Robert, explained to people-- because this was the number one question we got after that jobs report: how is it that you get a headline number? That's so disappointing, but unemployment rate is that low? I mean, is it good? Is it bad?Robert Rosener Yeah, it's a really mixed picture and a lot of different indicators pointing in a lot of different directions. So of course, we got our latest read on the labor market that showed a slower than anticipated rise in jobs. In the month of November, we created 210,000 jobs. That was less than half of what was expected, but overall, the report still had a solid tone. And one of the reasons why there are still solid indications coming from the labor market is that we're seeing continued healing from some of the biggest effects of the pandemic and that came through, most notably in November in labor force participation. One of the biggest shortfalls in the labor market has been the number of individuals who are actually actively participating in the labor force. We saw the labor force participation rate, in total, rise 20 basis points in November to 61.8%. That's still well below the 63.4% peak we saw pre-COVID, but it's notably out of the very sticky range it's been in since the summer. So we're seeing continued healing there. We're expecting that healing is going to continue, and that's going to be a very important part of this labor market recovery.Ellen Zentner So what are you telling clients then that are worried about wage pressures and where those might go? Because participation, rising participation, does matter there. So what's our message?Robert Rosener Well, much like the inflation backdrop, we're moving through a period of more elevated wage growth. There's been a significant amount of disruption in the labor market and alongside it, wage pressures have risen. But labor supply opening back up is a very important way that we're going to see supply and demand come back into balance in the labor market. We just got data on job openings, which showed that aggregate job openings in the economy are in excess of 11 million. There's one and a half open jobs for every unemployed individual in the labor market. If we boost the number of people who are actively participating in the labor market, it's going to bring those supply and demand metrics in better balance, and it should help to ease wage pressures alongside that.Ellen Zentner OK, that's interesting because, you know, one conversation that we have with our equity investors quite a bit is, you know, how should companies be looking at higher wage pressures? And of course, if you talk to economists and academics, right, we love to see higher nominal wages because that means stronger ba

Headed into next year, ‘Build Back Better’ legislation remains a work in progress, but Congress may find common ground in both parties’ concerns around one issue: tech regulation.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between US public policy and financial markets. It's Thursday, December 9th at 10:00 a.m. in New York. Congress continued to check things off its year end to do list this week, following up its funding deal to avoid a shutdown with an agreement to raise the debt ceiling. The Build Back Better plan, which features new spending on environmental and social issues backed by new taxes, remains a work in progress. So, this week we want to look ahead a little to an issue which could feature heavily in congressional debate next year: regulation of the tech industry. Now, to be clear, we think the prospects for congressional action ahead of the midterms are quite low. But major legislation that drives sea changes in policy often is a multi-year process and you can learn a lot by paying attention to that process. Republicans spent a decade crafting the tax reform that would drive their actions in 2018. The same for Democrats with the years preceding the Affordable Care Act and the Dodd-Frank reforms of the banking industry. And this coming year could be a particularly educational one in terms of how DC wants to tackle the tech industry. That's because the industry could continue to be a popular issue for both Republicans and Democrats. Both parties share concerns about content moderation, data privacy and company size, though they differ on the approach to dealing with these issues. Crucially, they also share a political motivation, with a recent poll showing the tech industry's approval rating with the American public at 11%, one of the few institutions with a lower approval rating than Congress. So what do we think we'll learn as Congress focuses on this issue? Policymakers are likely to update existing templates for regulating traditional broadcast media. That's because there are already institutions in place to do this, and it's easier for voters to understand the process. A bear case for what this could look like comes from overseas. The United Kingdom's Online Safety Bill and the European Union's Digital Markets Act spell out some big and potentially costly regulatory challenges for social media companies. This includes requirements to allow users to easily move their data, disallowing product tie-ins and preferential product placement, and potentially, legal and financial liability for harmful content. If such measures were adopted in the US, our colleague and coauthor Brian Nowak estimates this could meaningfully crimp social media companies’ ad revenue, leading to underperformance of the sector. But for now, we expect next year will reveal the U.S. is likely headed in a more moderate direction. Early legislative proposals tend to gravitate toward codifying data transparency, portability rights and content moderation. Here, our colleague Brian Nowak notes that internet companies have already begun investing heavily to develop internal infrastructure that deals with these types of regulations, potentially limiting the cost impact of new laws. That's a key reason he still sees value in this stock sector. But of course, that also means if we've read the policy direction in the US incorrectly, there's downside for the sector. So, we'll be watching carefully in 2022 to see if the U.S. continues to forge its own path or follows Europe in its approach to tech regulation. 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.

With early data in on the Omicron variant, biotechnology analyst Matthew Harrison takes us through where we stand on vaccine efficacy headed into the winter.----- Transcript -----Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Matthew Harrison And I'm Matthew Harrison, Biotechnology Analyst. Andrew Sheets And on this special edition of the podcast, we'll be talking about updates on the Omicron variant and vaccine efficacy. It's Wednesday, December 8th at 4:00 p.m. in London. Matthew Harrison And it's 11:00 a.m. in New York. Andrew Sheets So, Matt, it's great to talk to you again. We've had a lot of small pieces of data come out recently on the Omicron variant and its ability or not to evade vaccines. What's the latest and what do we know? Matthew Harrison So, we've had three studies published so far. I would caution that the samples are small, and we have to take them as that, but we do have some interesting trends developing. So, the first one is: most of the data has demonstrated a substantial drop in what are called 'neutralizing titers' against two doses of the vaccine. And so that unfortunately means that protection against symptomatic infection for people that have had two doses of the vaccine is quite limited. We don't know exactly what, but it's definitely below or at 50%. What we've also learned is that a third dose can help restore some of that protection. We don't know the durability of that dose and we don't know how much protection it restores, but it does restore some protection. I think importantly, though, one of the things to remember is that most of the globe has only had two doses. And as we run through this potential spread of Omicron over the next few months, most of the globe will continue to only have two doses. So that data on two doses does suggest that there can be substantial reinfection risk for those that have had the vaccine. Andrew Sheets So Matthew, you know, when we're thinking about these numbers and we think about vaccine efficacy, maybe dropping to 50%, what does that mean in terms of the risks versus current variants and then the risks if you're not vaccinated at all? Matthew Harrison Right. So, I think there are two important things that I would say. So, the first is, what we're talking about here is symptomatic infection. Some of the other data that's come out has been on T cells. T cells are the second component of your immune system. They help kill virus once it's already infected in cells, and the T cell data looks like there remains substantial protection driven by T cells. And so, I think what that says is even though we're seeing substantial drops in protection against symptomatic infection, my hope continues to be based on these data and other data we've looked at, that protection against severe outcomes such as hospitalization and death could remain quite high. Andrew Sheets So that seems quite important for both the public health outcomes. And then, as would follow the impact in the economy, is that it might be more likely that somebody with two shots of a vaccination regime would get some form of COVID, would show symptoms, but it might be still much less likely that they would end up in the hospital with severe cases, as the vaccines would still help the body protect against those more extreme outcomes. Matthew Harrison That is my hope and based on the data that we're seeing so far, I would note, as we talked about at the beginning, that all of these studies that we're seeing come out right now are preliminary. You know, my hope is over the course of the next week or so, we're going to have a lot broader data set available to answer many of the questions we're talking about. And so, we're still going to have to, take our time with this because we don't have complete information yet. Matthew Harrison So, Andrew, one of the questions I've been thinking about here is, and you touched on it in some of the questions you were asking me, is how does the market handle a substantial increase in the number of infections, but maybe a lower proportion of those infections ending up with severe disease than we've seen in previous waves? Andrew Sheets Yeah, thanks Matthew. So look, I think this distinction between, you know, any case of COVID that shows symptoms and a case of COVID that results in somebody being hospitalized, you know, that is a pretty big distinction. And again, it's quite possible to see headlines and get quite worried about headlines that you know this variant evades vaccines and kind of to think that, "oh, then vaccines are powerless to stop it" when you know, I think as your research has rightly highlighted, if the vaccines can still provide a powerful mitigant against the most severe cases against hospitalizations, and you can still avoid some of the most severe public health outcomes that really would force much bigger

With investors expected to deal with an increase in volatility in 2022, our outlook for European equities remains strong into next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Graham Secker, Head of Morgan Stanley’s European and UK equity strategy team. Along with my colleagues, bringing you a variety of perspectives, I’ll be talking about the recent volatility in asset markets and how it impacts our 2022 outlook for European equities. It’s Tuesday, December the 7th at 4pm in London. In recent weeks we have been arguing that equity investors would likely face an increase in volatility over the coming year. However, we hadn't envisaged this manifesting itself quite so soon, or that markets would face a double challenge from a renewed covid-driven growth scare and a tighter US monetary policy shift weighing on sentiment at the same time. To make matters worse, calendar effects are magnifying these uncertainties, with investors wary of adding risk - or alternatively encouraged to de-risk further - as we approach year-end. In the very short-term market volatility may remain high, however absent a severe hit to growth from the new variant we think this will prove to be an attractive entry point over the medium term for two reasons. First, European equity valuations look increasingly appealing. We can find plenty of attractively valued stocks here in Europe with 28% of listed companies trading on a PE below 12. Second, some of our tactical indicators are now quite extreme, with the number of 'bears' in the AAII investor survey now up to its 90th percentile – an occurrence that has historically proved a very strong buy signal.Post this drop in both equity valuations and investor sentiment we think that the worst of this equity correction is now behind us - absent a material profit disappointment that we just don’t see at this time. Such a scenario would likely require a more extensive and sustained hit to activity from the Omicron virus and/or a sharp deceleration in end demand that could signal that inflation is morphing into a more stagflationary environment. Neither do we see any growth implications from the apparent recent shift in Fed policy. Here we think the biggest implications for equity markets comes from a potential increase in real yields which traditionally occurs at the start of a new Fed tightening cycle. Such a move would fit with our bond strategists forecast for a significant rise in US real yields up to -30bps next year, an outcome that would likely cause substantial disruption within equity markets. Specifically, higher real yields should increase valuation sensitivity and push equity investors to skew portfolios away from some of the most popular and expensive stocks in the market and towards those offering better value. At the regional level such a shift should favor European stocks over US peers as valuations here have already normalized. Looking out over the next 12 months our index target for MSCI Europe suggests 13% price upside from here, which rises to over 16% when we add in the dividend yield too. Within the market we prefer the more value-oriented sectors given the prospect of higher bond yields, attractive valuations and greater scope for earnings upgrades given that current expectations look unduly low. In particular, we like Autos, Banks and Energy – all three have outperformed the market in 2021 and we see more upside next year too.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.  

The past few weeks have seen weak valuations across equity markets. While many look to the Omicron variant as the main culprit, the correction may have more to do with the recent Fed pivot.----- 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, bring you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, December 6th at 2:30 p.m. in New York. So let's get after it. While there's evidence the past few weeks have been rough for equity investors, there's a lot of debate around why stocks have been so weak. To us, it seemed like too much attention had been put on the new COVID variant, Omicron, as the primary culprit. Our focus has been much more on the Fed's more aggressive pivot on tapering asset purchases. Last Tuesday, Fed Chair Jay Powell told Congress that it was time to retire the word 'transient' when talking about inflation. This was a significant change for a Fed that had been arguing inflation would likely settle back down next year as supply chains adjusted to the increased demand. As a result, the Fed is now likely to reduce its asset purchase program - known as quantitative easing, or QE - twice as fast as it had previously told us. In short, we now expect the Fed to be completely done with its QE program by the end of March. That is quite a speedy exit in our view and is likely to leave a mark on asset prices. Hence, the sharp correction in stocks last week, especially the most expensive ones. Importantly, this move by the Fed is very much in line with our mid-cycle transition narrative that regular listeners should recognize. From an investment standpoint, the most important thing one needs to know about the mid-cycle transition is that valuations typically come down. In S&P 500 terms, it's typically 20%. So far, we've seen valuations come down by only 10%, making this normalization process only about halfway done, at least at the index level. The good news is many individual stocks have gone through a derating of much greater than 20% already. The bad news is that while some of the most expensive stocks have been hit the hardest, they still look expensive when normalizing for the period of over-earning these companies enjoyed in 2021. Sectors we think look particularly vulnerable include consumer discretionary and technology stocks. Sectors that look cheap are health care and financials. Another consideration for investors is the fact that this White House appears to be more focused on getting inflation under control, rather than keeping the stock market propped up. This might give the Fed cover to stay the course on its plans to withdraw policy accommodation more aggressively. In other words, investors should not be so confident the Fed will reverse course quickly if stocks continue to wobble into year end. Finally, the new variant can't be completely ignored and does pose a risk to demand. However, we always expected another big wave of COVID this winter as the cold weather set in. In fact, the recent spike in cases in the US are almost exclusively the Delta variant. In other words, we would be seeing this spike with or without Omicron's arrival. This is one of the reasons we've been expecting demand to disappoint in the first quarter and another thing that markets will have to deal with as we go into next year. Bottom line, expect markets to remain volatile into year-end as investors are forced to chase and de-risk depending on the price action. In short, moves up and down will be accentuated by asset managers trying to keep up with their benchmarks. In such an environment, we recommend investors continue to keep their risk lower than normal with a focus on large cap quality stocks trading at a reasonable valuation. We expect that over the next three to four months, markets will give us a much fatter pitch to swing at as the Fed completes its exit from QE and growth bottoms. 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.

One of our most controversial calls for 2022, that the Fed won’t hike interest rates next year, faces renewed scrutiny amidst high inflation, signals on tapering, and today's employment report.----- 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, December 3rd at 2:00 p.m. in London. We recently published our year ahead outlook for 2022 and right there on the cover, near the top, is one of Morgan Stanley Research's most controversial calls: that the U.S. Federal Reserve will not raise interest rates next year. Over the last week, more than one investor has pointed to this report and asked if it still applies. After all, inflation has been high, a situation that tends to call for higher interest rates to cool the economy. And Federal Reserve officials have been increasingly vocal about the merits of slowing their bond buying, accelerating the so-called tapering, even more quickly than they originally intended. Seeing the economy is strong and in less need of that additional support. If the Fed is going to slow down and then stop its bond buying more quickly, the argument goes, surely higher interest rates must be right around the corner. But there's an interesting phenomenon here. When you talk to most investors, they view both higher interest rates and fewer bond purchases as pretty similar things. Both actions, at their core, signal less central bank support for the economy and for markets. But maybe, just maybe, central banks view the world a little differently. For them, buying any bond, even fewer of them, still represents additional support for the economy. But in contrast, increasing interest rates... well, that's different. That's not additional support, that's actively tightening monetary policy. At the end of the day, this question is up to the central bankers. But if they do see a genuine distinction between these two actions - a difference that isn't necessarily as apparent to many investors - a faster taper may be able to coexist with a later first interest rate hike. That, at least, is how we see it at Morgan Stanley Research where our forecast is for exactly that - the Fed to accelerate the pace of its taper but not raise interest rates next year. But there's one more wrinkle in this story. While we think the Federal Reserve will ultimately wait longer than most people expect to raise interest rates next year, there's little reason for them to make that clear now. Inflation is still high and probably won't start to fall for several months. Economic data has been strong and today's employment report showed yet another decline in the unemployment rate. We see little reason why the Fed would want to commit not to take action right now, even if we think that's what they ultimately might do. Why does that matter? It will mean that in the near term, the Federal Reserve will appear to be taking support away from the economy and for markets. After extraordinary intervention to support markets and the economy, the central bank training wheels are coming off, so to speak, and this impact may be uneven. We think this creates the greatest challenge for highly valued growth stocks in the U.S. and emerging market assets and suggests that investors be patient before trying to buy both. 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.