Joachim Fels, Morgan Stanley’s co-head of global economics, wonders whether last week’s market moves — which saw growth stocks get slammed and U.S. Treasuries stage a swift rally, pushing interest rates lower — were indicative of market participants buying into the idea of permanently-impaired growth potential in the United States, a concept commonly known as “secular stagnation.“
The answer, he says, is no, based on conversations with investors over the weekend at a conference. In his weekly “Sunday Start” note to the firm’s clients, he writes:
Judged by the polling results and the views expressed by the clients attending our 14th Annual Global Macro Forum in Washington, DC, where Larry Summers presented his latest thoughts on secular stagnation and other issues this past week, investors are still far away from fully embracing the Summers thesis. Otherwise, the consensus in the room wouldn’t have been looking for a first Fed rate hike next year, higher US bond yields and rising stock markets.
According to our polling, close to 40% of the participants expect the Fed to hike rates already in 1H15, and another close to 40% in 2H15. And so 90% expect 2-year UST yields (which sank to 0.36% on Friday) to trade above 0.5% and two-thirds expect 10-year yields to stand above 3.0% a year from now. With close to 40% of the room expecting the S&P 500 to be down rather than up on a 12-month horizon, the sentiment on stocks was by far not as bullish as at other conferences we held earlier this year, but this probably reflects both recent market performance and the fact that most of the DC participants are focused on fixed income markets. Still, close to 40% said equities are their preferred asset class over the next 12 months, and another 40% prefer real estate. These are not exactly secular stagnation trades.
By contrast, the tone among DC participants about emerging markets was quite cautious overall, despite the decent recent rally in EM currencies, bonds and equities. Only 7% thought the necessary economic adjustment in EM was complete, against two-thirds who thought EM was more than halfway through and one-quarter who believe we’re not even halfway done. Three-quarters of the room expected China’s adjustment path to be either very volatile or even crisis-prone (though the room was exactly 50% bullish and 50% bearish on Chinese equities). The score on EM local debt bears versus bulls was 85% to 15%. So overall, there was little pushback to the still cautious view on EM presented by my colleagues Manoj Pradhan and Rashique Rahman.
David Zervos, chief market strategist at Jefferies, recently raised the possibility that the Fed was making a policy mistake based on the drop in long-term inflation expectations since the Fed began winding down its quantitative easing program in December.
Still, according to Fels, the consensus isn’t ready to let go of the sunnier outlook.
As for the recent sell-off, it can likely be explained by extreme positioning in hot momentum stocks that fuelled the decline when things started to turn.
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