Morgan Stanley’s warning: Stocks 12-year TINA advantage could be ending

Market


For last 12 years, equities globally had two major tailwinds: A friendly Fed and some variation of ‘TINA’ (There Is No Alternative) theme playing out. But now these advantages of stocks could be ending, according to Morgan Stanley’s strategist Andrew Sheets. 

“For much of the last 12 years, it was common to hear some variation of ‘TINA’ (There Is No Alternative), the idea that one needed to be long stocks and bonds because cash offered so little. Low yields were not the primary reason why stocks rallied over that time; global equities and global equity earnings simply rose by the same amount (100%). But was TINA a helpful mental crutch for markets,especially in times of stress? Absolutely,” he said in a note. 

“But now tighter policy rates are now scrambling that mindset. Six-month US T-bills yield about 3.75% and , cash and short-term fixed income increasingly offer lower volatility and high yield within a cross-asset portfolio. US 1- to 5-year credit yields ~4.9% against an S&P 500 earnings yield of 5.9%. But over the last 30 days, the S&P 500 has been 5.7 times more volatile.”

In other words, he says, investors now have a number of higher-yielding, lower-volatility alternatives if they want to step back from the equity market. 

“We think this helps to support US Dollar, keeps my colleague Mike Wilson cautious on US equities and leads us to see credit outperforming equities in the US and emerging markets,” he added. 

According to Andrew Sheets, exactly what the Fed will need to do to slow down inflationary pressures seems increasingly uncertain. Fed Chair Jerome Powell and his colleagues meet on September 21-22 to set interest rates. Analysts expect another jumbo-sized rate increase of 75 basis points but some don’t rule out a full percentage point hike after last week’s hot inflation data, combined with a strong labor market and retail sales numbers.

“At the low end of the income distribution, where households are more likely to face high rent inflation and be more impacted by higher food and energy costs. This seems to present a real dilemma, one that in the market’s eyes increases the likelihood that the Fed will have to do more,” the Morgan Stanley strategist says.  

“Despite higher rates,higher energy prices, conflict in Europe,and a host of other challenges, the world’s largest economy continues to trundle along. Year to date, the US economy has added 3.5 million jobs and US manufacturing activity has expanded each and every month. The CPI number has implications for monetary policy but also raises a much broader question about where we are in the cycle. The market is still facing late-cycle conditions: inflation that is too high, policy that is tightening,a yield curve that’s inverted,and a slowdown in growth that is ahead not behind” he says. 

For markets, this has a number of implications. “Psychologically, it means adjusting to a world where the Fed no longer seems as friendly and market supportive. Over much of the last 12years, with inflation undershooting targets, central banks were often happy to push for easy policy when conditions looked tough. But with inflation now high in the US, the UK and the eurozone, that dynamic has changed,” he says.  

 

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