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- A “tectonic shift” in US macroeconomic policy that could cause increased capital investment and be bullish for sectors like financials and consumer durables may be up ahead, according to Morgan Stanley Wealth Management’s Lisa Shalett.
- The CIO said on Monday that a decade of slowing growth and rising wealth inequality has led some investors to begin to tolerate increased fiscal spending and higher inflation.
- This new policy regime should produce “fresh market leadership centered on capital investment, infrastructure, housing, and a leveraged consumer sector,” said Shalett.
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There’s a major shift coming for stock markets that goes well beyond the usual business cycle reversal, Morgan Stanley is warning.
A decade of slowing secular growth and rising wealth inequality, paired with the failure of monetary policies to normalize growth is leading to a “tectonic shift” in US macroeconomic policy, the Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett said in a Monday note to clients.
“With policy interest rates at the zero lower bound on fed funds and wealth/income inequality at levels not seen since the 1920s, investors are turning to Keynesian approaches to break the logjam of excess supply and savings chasing insufficient aggregate demand,” Shalett said.
Those “Keynesian” approaches could come in the forms of tolerating increased spending from the government and tolerating higher inflation, said Shalett.
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“The new business cycle, combined with a vastly different policy regime, should produce fresh market leadership centered on capital investment, infrastructure, housing, and a leveraged consumer sector,” she added.
Shalett said stock sectors that will benefit from this shift include financials, industrials, clean energy, construction, consumer durables, and service-sector automation.
This shift will occur soon because of the current levels of volatility in the stock market, she said. Volatility within the CBOE VIX volatility index is at its third highest in five years. The last two times it reached these levels in recent times, Shalett said, structural change in the form of the Fed’s reversal of monetary policy from tightening to easing, and the Covid-19-induced lockdowns happened. This time, the results could be even more pronounced.
“We don’t see recent market volatility as merely signaling a pause in the bull market related to temporary uncertainties, nor do we think it’s an end-of-cycle repositioning that accompanies all recessions,” Shalett said. “Rather, we see market churning as a burgeoning recognition by investors of much more profound change in which government activism, spending and regulation are cheered by investors while debt, inflation and dollar debasement are acknowledged as necessary for economic normalization.”
This profound shift means US Treasuries, the dollar, and overvalued long-duration assets are at risk.
“Could the VIX volatility be signaling a structural shift or a shift in the business cycle?” Shalett said. “We think chances are decent of both, which is why we don’t recommend sticking with yesterday’s leaders.”
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