By Michael Wilson, chief US equity strategist at Morgan Stanley
For the past several weeks, we have engaged with many clients from a broad range of disciplines (macro, equity, fixed income, institutional and retail) about our outlook for 2024. From these conversations, the primary takeaway is that there’s not much conviction about how this year will play out and/or how to position one’s portfolio. After one of the biggest rallies in history in both bonds and stocks to finish the year, there’s a sense that markets may need to take a breather before the next theme emerges. From our perspective, not much has changed fundamentally from three months ago other than the price of most assets.
In our view, we remain in a late-cycle environment during which markets will oscillate between accelerating and decelerating growth narratives. The data continue to support this view, with both positive and negative data points materializing on the economy and earnings – a continuation of the crosscurrents we saw in 2023. However, as noted, asset prices are materially higher than three months ago, thanks mainly to the Fed’s transition from “higher for longer” to “we’re done hiking and likely to be easing in 2024.” In addition to the timing and pace of interest rate cuts, investors are also starting to ponder if and when the Fed will end its quantitative tightening (QT) campaign. Since embarking on this latest round of QT, the Fed’s balance sheet has shrunk by nearly US$1.5 trillion. However, it’s still about US$500 billion above the June 2020 levels which followed the ~US$3 trillion surge to offset the impact of Covid lockdowns. That the Fed’s balance sheet has normalized to desirable levels is debatable. Nevertheless, our economists and strategists think the Fed will begin to taper QT starting this summer (see Earlier Start, Slower Taper). More importantly, we think equity prices now largely reflect this shift and it remains to be seen whether it will lift the path of growth in and of itself.
