Stocks will drop as the economy is either about to enter a recession or the Fed is poised to keep rates higher for longer, Morgan Stanley CIO says
- Stocks are set to fall further, Morgan Stanley’s top stock strategist Mike Wilson predicted.
- That’s because the economy is either headed for a recession or the Fed will keep interest rates high.
- Both factors will weigh on corporate earnings, which are likely to fall below estimates, Wilson said.
Stocks are set to fall further, as investors realize the economy is either headed for a recession or the Federal Reserve is poised to keep interest rates higher for longer, according to Morgan Stanley’s top stock strategist Mike Wilson.
In a podcast on Monday, Wilson pointed to recent upbeat sentiment in the stock market, likely because investors are expecting the Fed to cut interest rates later this year, all while maintaining expectations for further economic growth. But the probability of both of those happening are low, he said, and that spells trouble for corporate earnings, and in turn, the stock market.
“We believe the equity market continues to expect the best of both worlds: interest rate cuts and durable growth,” Wilson said. “Instead, we believe another chapter of our fire-and-ice narrative is possible: in other words, a tighter Fed even as growth slows towards recession. This will be a difficult environment for stocks,” he later warned.
Wilson has warned before that stocks are facing a “fire-and-ice” scenario, in which high inflation and the possibility of a recession will weigh on corporate earnings. Though investors have been encouraged by surprisingly strong earnings over the past quarter, a continuation of the trend isn’t supported by the economic data, Wilson said.
“If one is to believe our leading indicators that point to downward trends in earnings-per-share surprising margins in the coming months, stocks will likely follow that negative path lower,” he added.
Wilson has predicted that the worst earnings recession since 2008 could hit the market this year, which could take stocks down 26%.
That comes after an already difficult year for equities, with the S&P 500 losing 20% in 2022 as the Fed aggressively hiked interest rates to tame inflation. Higher rates have significantly raised the odds of recession, experts say, and they’ve also weighed heavily on corporate profits by raising the cost of borrowing.
The Fed hiked interest rates another 25 basis-points last week, lifting the Fed funds rate target to 5-5.25%. Investors are pricing in a 33% chance the Fed could cut rates as soon as July, per the CME FedWatch tool, though that possibility has been dismissed by other Wall Street strategists, who say the Fed will pause and then keep rates elevated.
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Credit Agricole's Zhi on China's Economy, Stimulus – Bloomberg
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Canada’s largest solar farm, GDP growth and an immigrant jobs boom: Must-read business and investing stories
Getting caught up on a week that got away? Here’s your weekly digest of the Globe’s most essential business and investing stories, with insights and analysis from the pros, stock tips, portfolio strategies and more.
Canada’s first-quarter GDP rose higher than expected
Canada outperformed expectations on its first-quarter gross domestic product (GDP) reading earlier this week, prompting some speculation the Bank of Canada could raise interest rates again – perhaps as early as next week. The Canadian economy grew at an annualized rate of 3.1 per cent in the first quarter, buoyed by strong exports and robust consumer spending. Mark Rendell reports, however, that this economic resilience is a problem for Canada’s central bank, which is deliberately trying to slow down the economy to bring inflation back under control. David Parkinson also writes that the quarter’s brisk growth rate is “too much of a good thing” because it implies more inflationary pressure in the quarter, not less.
A recession might be just what Canada needs
What if a recession – or a prolonged economic slump – is exactly what Canada needs? According to Tim Kiladze and Matt Lundy, the R-word might be the only way to reset the country’s overheated economy. Historically, the economy has gone into recession roughly once a decade. And not every recession is as painful as the 2008-09 global financial crisis. A group of prominent economists recently put out a paper looking at advanced economies since the end of the Second World War, and concluded that a recession now would help to quash runaway inflation, sky-high price increases and cool down the housing market.
Canadian consumer spending is at an all-time high
Can we shop our way out of a recession? Consumers in Canada are giving it their best shot. This week’s strong first-quarter GDP growth was powered by two sectors – exports and consumer spending. Consumer spending, specifically, rose 5.7 per cent on an annualized basis. That growth was twice as fast as economists expected, and it pushed consumer spending to its highest share of GDP since records began in 1961. Resilient consumers have been credited for helping stave off recession in the United States, but Canadian shoppers are outspending their U.S. counterparts. Jason Kirby takes a closer look in this week’s Decoder.
Greek company Mytilineos to launch Canada’s largest solar farm in Alberta
Mytilineos, one of the top industrial and power companies in Greece, is launching a $1.7-billion solar-energy project in Alberta that it says will be the largest of its kind in Canada. The project will be built on separate plots in Southern Alberta, one of the sunniest areas in Canada and home to many of the country’s biggest solar farms. Once finished, it will have enough capacity to power 200,000 homes. Eric Reguly reports that fossil fuels account for almost 90 per cent of power generation in Alberta, and the province is under pressure to bring that share down as Ottawa strives to meet the net-zero emissions goal by 2050.
The good and bad of Canada’s immigrant jobs boom
Canada’s labour boom is creating plenty of opportunities for recent immigrants, according to Matt Lundy. The employment rate for recent immigrants – those who landed in Canada within the past five years – has topped 70 per cent, the strongest level on record. What’s contributing to the unequivocally positive trend? The biggest factor in the employment surge is that Canada has moved toward a two-step immigration process, meaning a larger share of people who become permanent residents have already worked in Canada as temporary residents.
Gen Z thinks you need to make $100,000 to live comfortably
How much do you think you need to live comfortably in Canada? According to a recent poll by Abacus Data, Gen Z believes they need to earn an average of $100,953 to live a comfortable life. For reference, boomers said $63,753, Gen X said $84,700, and millennials said $87,386. According to Rob Carrick, it seems clear in these numbers that the older and more established you are, the less you figure you need to live a comfortable life. He writes that young people know what they’re up against trying to afford adulthood. Do the rest of us?
Sign up for MoneySmart Bootcamp: If you want to improve your financial fitness, The Globe’s MoneySmart Bootcamp newsletter course is for you. This new five-part course written by personal finance reporter Erica Alini will improve your personal finance skills, including budgeting, borrowing and investing. Subscribe to the MoneySmart Bootcamp and you’ll receive an e-mail a week to work a different financial muscle. Lessons will land in your inbox Wednesday afternoons.
Now that you’re all caught up, prepare for the week ahead with the Globe’s investing calendar.
Can market veteran Simsek pull Turkey’s economy back from brink?
Mehmet Simsek, a former Turkish finance chief popular among foreign investors, has taken the helm of the economy again, signalling a return to more orthodox economic policies.
The United Kingdom-educated Simsek, a former strategist at London-based Merrill Lynch, was appointed treasury and finance minister on Saturday as Turkish President Recep Tayyip Erdogan announced his new cabinet after winning the May 28 presidential run-off that extended his rule for five more years and into a third decade.
Turkey is in the midst of a cost-of-living crisis stemming from soaring inflation, which peaked at 85.5 percent in October compared with a year ago before easing to 43.7 percent in April with a favourable base effect.
Analysts largely blame the crisis on Erdogan’s unorthodox economic strategy of low interest rates and credit expansion with increasing state control on financial markets that the government says it pursued to push investments, production, exports and growth.
The Turkish lira has lost some 150 percent of its value in the last two years as the country’s $900bn economy came under immense pressure amid depleted foreign reserves, a swiftly increasing current account deficit, and a snowballing state-backed scheme of lira deposits protected against the currency’s depreciation.
The lira lost about 23 percent of its value since the beginning of this year and stood at a record low of nearly 21 against the United States dollar on Sunday.
‘Transparency, consistency, predictability’
Simsek, 56, who was finance minister between 2009 and 2015 and then deputy prime minister until July 2018, is a market-friendly figure known to foreign investors as an advocate of conventional economic policies, transparency and an independent central bank.
He said during a handover ceremony on Sunday that the country “has no other choice than to return to a rational ground” and that a “rules-based, predictable Turkish economy will be the key to achieving the desired prosperity”.
“Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving this goal,” he said, adding that among the main targets was “establishing fiscal discipline and ensuring price stability for sustainable high growth”.
Seref Oguz, a senior economist and columnist, said the negotiations between Simsek and Erdogan for the position took a long time because the former wanted to secure his conditions before accepting.
“Simsek put forward three conditions to get on board with the position,” Oguz told Al Jazeera.
The first condition, according to Oguz, was the authority to make his own decisions. The second was to be able to design the country’s economy teams, and the third was for him to be given adequate time to fix the economy’s problems.
Local and international media started reporting about talks over Simsek’s possible reappointment before the first round of the presidential elections on May 14.
After none of the candidates failed to secure more than 50 percent of votes for an outright victory, media close to the government intensified its reporting on a likely nod for Simsek provided Erdogan remained in power.
Addressing his supporters after his election victory on May 28, Erdogan said that he would have “internationally reputed finance management”, in an apparent reference to his former minister.
Hence, foreign investors already knew that Simsek’s appointment was highly probable before Saturday’s announcement.
Erdogan named Cevdet Yilmaz – another cabinet member who backs orthodox economic policies – as Turkey’s vice president.
Simsek said on Sunday that the government’s main purpose is to increase social welfare in Turkey.
Ceyhun Elgin, a professor of economics at Istanbul’s Bogazici University, said Simsek is expected to pursue a monetary policy aiming for low inflation rather than credit expansion and growth.
“This means there will be higher policy interest rates to fight inflation,” he told Al Jazeera.
Elgin added that the new minister would not abolish the lira deposits scheme protected against foreign currencies amid depleted foreign currency reserves, but that he might do so “after Turkey’s foreign reserves reach a certain level with the influence of increasing interest rates”.
The indirect state controls on the lira’s exchange rate against foreign reserve currencies are expected to be gradually lifted, Elgin said, leading to controlled depreciation of Turkey’s currency.
Erdogan is known for his belief that high interest rates are the cause of high inflation, not the cure for it.
“Interest and inflation are directly proportional. Interest is the cause, inflation is the effect. There may be people who do not believe this, but this is what I believe,” the president said earlier this year.
Simsek said that it was vital for Turkey “to reduce inflation to single digits again in the medium term … and to speed up the structural transformation which will reduce the current account deficit”.
Turkey’s central bank, the independence of which is seen to have eroded over time, has cut its policy rate to 8.5 percent from 19 percent since late 2021 because of Erdogan’s economic views.
The lira deposit scheme protected against the currency’s depreciation was launched in 2021 in an attempt to keep the lira valuable. It now holds the equivalent of about $125bn.
Erdogan has also followed a policy of credit expansion, at times utilising public banks to provide loans with extremely low borrowing costs, which skyrocketed purchases of properties and cars among other consumption in the last few years.
Oguz said Simsek’s name and appointment are important for Turkey to attract foreign investment, but that investors will want to see the autonomy and authority of the new finance chief.
“Therefore, the first 100 days of Simsek are crucial, in which we will see what authorities he will be able to use, and how he will oversee or change the economy-related positions, including the chief of the central bank,” Oguz said.
He added: “The investors will, in particular, watch the actions that will be taken on the interest rates and lira’s exchange rate, which was kept valuable up until now, but is slowly being released to depreciate against the dollar.”
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