Morgan Stanley: We Don't Buy This Market


Morgan Stanley continues to be one of the most bearish big shops around, and the latest Global Asset Strategy report from Gregory Peters drives that home.

The report is titled Fundamental Disconnect and the gist is that the market represents a battle right now between deteriorating fundamentals and central bank liquidity actions, and that the deteriorating fundamentals are likely to trump the easing in the end.

The general view on markets is summed up here:

We stay cautiously positioned overall and sceptical about the risk rally’s sustainability without growth improving. Policy action may provide a tailwind for a little longer, but better growth is necessary. Though we wouldn’t add risk, there isn’t a clear negative growth catalyst to sell, and positioning remains supportive.

The whole thing is couched and hedged, but the bottom line is that there are a lot of risks that monetary policy can’t overcome forever.

Among the specific, here’s Peter:

  • US Earnings Outlook. 2Q earnings have tracked ahead of expectations but were driven by financials, while guidance is more negative than at any time in this cycle. Watch for earnings growth downgrades for 4Q & 2013 estimates.
  • Europe not yet fixed. The ECB’s OMT program is a positive and some progress has been made towards a banking union. However, the OMT won’t be triggered until Spain applies to the EFSF / ESM for assistance.
  • China hard landing. Growth fails to pick up because of an external slowdown, delay in policy easing intensification to spur growth, and inflation risks.
  • Political election cycles. US election and the fiscal cliff lead to ineffective or counter-productive fiscal policies.

We’d add 3 observations of our own regarding Morgan Stanley’s outlook.

The first is that the risk factors cited above are the risk factors that everyone is thinking about. They’ve all been picked apart like crazy. That’s not to say they’re not real issues, just that they can’t be a surprise to anyone.

Secondly, the idea that the market is currently disconnected from fundamentals is not necessarily based in reality. People say it all the time, but the fact of the matter is that economic surprises have been picking up for a while. Jeff Miller has presented a good case here for why the new highs in the market are justified by earnings, as well.

Finally, we’re inclined to agree with the overall point, which is one that we’ve made many times: Fundamentals still matter, and trump central bank action.

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