US consumer confidence is at its lowest levels in a decade. In addition, inflation expectations have skyrocketed, which is the great problem of the economy, one that is only going to get complicated after Russia’s invasion and war in Ukraine, in addition to international sanctions against the aggressor.
Pessimism is settling in the US after two years of the pandemic and with the start of a war in Eastern Europe with an aggressor, Russia, which is key in the very tense market for oil and gas, raw materials and agricultural products.
Inflation weighs on the pockets of consumers and much more when it comes to low-income households, but the chief investment director of Morgan Stanley, Lisa Shalett, considers in a report to subscribers that although the geopolitical situation and the change in monetary policy has hit the financial markets, “The US economy could be in a much firmer moment”.
The repeated question that “the stock market is not the economy and the economy is not the stock market”, acquires a new meaning since this durable is normally applied when the indices rise oblivious to difficult situations for the economy in which Americans live. And now the divergence is the opposite.
“For the markets we see headwinds with the tightening of financial conditions due to the rise in interest rates,” explains this Morgan Stanley analyst. And so it is reflected. The Dow Jones index of the New York Stock Exchange accumulates a fall so far in 2022 of 9.3%, that of the S&P 500 is 11.5% and that of the technological Nasdaq almost 20%
Shalett believes that stocks and bonds are relatively highly priced and highly sensitive to interest rates than the Federal Reserve. The monetary authority will raise rates, in all probability a quarter of a point after its meeting on March 15 and 16 and it will be the beginning of the upward trajectory.
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On the other hand, the profit expectations of companies are very high despite the high costs of logistics, labor and inflation. No fruit, like this analyst points out, the corporate forecasts for the future evolution of the accounts have begun to send disappointing signals and this is something that will be reflected in the markets.
According to figures from FactSet, analysts are lowering projections for the current quarter of earnings per share (EPS). And although higher EPS is expected than in 2021, growth as important as it was last year is not expected.
Meanwhile, the economy is in the situation of the company.
The US grew at a rate of 7% in the last quarter of 2021, in the last three months 1.74 million new jobs have been created and wages are rising.
Pessimism is spreading due to the effects of inflation, but Shalett estimates that in the next two years growth will be above the average of the last decade because, even if it slows down, it will do so below very high levels.
This analyst recalls that the creditworthiness and the balances of the homes are in good statusthe economy is much less sensitive to interest rates than the markets and the labor market continues to grow, which ensures employment and the ability to negotiate wages.
Given that the outlook for the economy and markets is likely to be different, this economist is committed to active portfolio management. “Unlike in the past when investors sought shelter in large-cap growth stocks, this time around they can afford to be patient but still selective and opportunistic in several reasonably priced, quality names.”
Your bet? Finance, energy, industry, health and consumer services.