Posted on July 19, 2019 by Admin
Since President Donald Trump reignited the US-China trade war several weeks ago, experts across Wall Street have been weighing the worst-case scenario. They've looked at how it could hurt equity markets and how it could erode future corporate profitability. Some of the more extreme scenarios have even involved a severe economic slowdown culminating in the…
Since President Donald Trump reignited the US-China trade war several weeks ago, experts across Wall Street have been weighing the worst-case scenario.
They've looked at how it could hurt equity markets and how it could erode future corporate profitability. Some of the more extreme scenarios have even involved a severe economic slowdown culminating in the next full-blown recession.
But what if it's already too late?
It's a troubling idea weighed by Morgan Stanley's equity-strategy team in its most recent note to clients. A recent spate of weak economic data has caught the firm's attention, and its warning is clear: Trade war or not, the economy looks far worse under the surface than most realize.
"We think the recently weaker macro data was already in motion before this latest round of the US-China trade dispute," Mike Wilson, Morgan Stanley's chief US equity strategist, wrote to clients.
Here's a rundown of the disappointing data being assessed by Morgan Stanley:
Those negative trends actually culminated in a proprietary economic indicator maintained by Morgan Stanley falling to its lowest level since — you guessed it — the most recent recession more than a decade ago. And, as the chart below shows, that actually happened before the trade war started flaring up again.
That's all culminated in Morgan Stanley chopping its second-quarter forecast for gross-domestic-product growth nearly in half, to 0.6% from 1%.
But wait, there's more. Perhaps most jarring of all, the firm notes that the yield curve paints a much starker picture once its calculation is adjusted to back out the Federal Reserve's quantitative easing and tightening behavior.
"The adjusted yield curve inverted last November and has remained in negative territory ever since, surpassing the minimum time required for a valid meaningful economic slowdown signal," Wilson said. "It also suggests the 'shot clock' started six months ago, putting us 'in the zone' for a recession watch."
With all that in mind, Morgan Stanley concludes that all the hand-wringing over the bond market pricing in a rate cut may have been valid all along. The same goes for the defensive stance many equity investors have adopted since Trump and his Chinese counterparts have escalated the global trade war.
It's ultimately an uncertain time right now. And with price swings expected to pick up in earnest this year, Morgan Stanley's findings suggest investors would be best advised to position defensively — even in the event of a successful trade-war resolution.
"The curve inverted about the same time the trade truce happened in late November and has stayed inverted despite all the positive rhetoric earlier this year around a trade deal," Wilson said. "We think this means the US economic slowdown and rising recession risk is happening regardless of the trade outcome."