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Morgan Stanley Smith Barney is out with its latest Asset Allocation and Strategy Weekly report to its clients.Adam Parker, Morgan’s top U.S. equity strategist, might be the most bearish name on Wall Strategist. Parker is calling for the S&P 500 to fall to 1,167 by year end.
So, it’s no surprise that the firm’s list of reasons to be bullish/bearish on stocks tilts bearish.
But they do have some positive things to say about stocks.
Equity Bearish Factors
- The ongoing deleveraging in the big developed market economies will take several years to run its course; historically, the byproduct of this has been sluggish growth for a long time.
- Europe is at risk of slipping into a “lost decade” triggered by lack of leadership and institutional flexibility at the European Central Bank and elsewhere.
- Global growth is overwhelmingly dependent on EM policymakers. Many are not as seasoned as developed-market policymakers.
- Sovereign burdens are too high in several developed countries. Hard political choices need to be made or currency values are at risk.
- Falling US home prices continue to be a drag.
- The benchmark 10-year US Treasury yield remains near a multi-decade low. As it rises in the years ahead, it could be a headwind for expansion of P/E multiples.
- “Event risk,” such as a terrorist attack, is ever-present
Equity Bullish Factors
- A forward price/earnings ratio near 13 for global and US equities is historically low. Equities are also cheap relative to bonds and cash.
- Despite recession in Europe, US and global growth will likely remain positive, the latter driven by slowing but still strong growth in most emerging market economies.
- Incremental consumer spending in the emerging markets (EM) eclipsed US consumer spending several years ago. What’s more, EM consumer growth is in its infancy: for example, only 2% of Brazilians have a mortgage.
- Global inflation is low and likely to go lower. Price pressures are thus unlikely to pose a problem in most economies for an extended period.
- By almost any metric, the planet is now more peaceful than at any time in human history. Remember the old adage: when goods cross borders, soldiers don’t.
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