(MarketWatch) So we start the week with U.S. stock market indexes just a few steps away from all time highs.
That is even after Friday’s extra strong jobs data rattled some investors, who worried that the Fed could be deterred from cutting interest rates in a few weeks. But according to CME Group, that cut is happening.
Our call of the day though, kicks things off with a warning from Morgan Stanley which is “putting our money where our mouth is” and downgrading global equities to underweight from equal-weight.
Here’s why: ‘The most straightforward reason for the shift is simple—we project poor returns,” said Andrew Sheets and a team of strategists.
The S&P 500, MSCI Europe, MSCI Emerging Markets and Topix Japan indexes are currently only about 1%, on average, below Morgan Stanley’s current price targets—or their best guess for the indexes’ fair value. “There comes a point for every analyst where you need to change your forecast or change your view. We’re doing the latter,” wrote Sheets and team.
Morgan Stanley is expecting a rate cut, but Sheets argues history shows that when central banks cut because growth is weak, it is the weakness that matters more for stocks in the end. “If you don’t believe us, we have some European stocks from April 2015, shortly after the European Central Bank’s first QE program was announced, that we’d like to sell you”, he added.
The Stoxx 600 index of leading European shares is down 3.6% since April 1 2015.
Sheets and team are mindful of the “many ways we could be wrong”, Sheets wrote, with exhibit A being the chance that economic data could come in strong, and the Fed cuts rates anyway. That could lead to higher inflation expectations, and a boost for commodity prices, he added.
