Over the past several months, Morgan Stanley – together with the sellside strategists at Goldman, JPM, BofA and most other banks – has had a rather bleak view of not only the economy, but also the ongoing market rally (which as we showed earlier has climbed a fascinating wall of hedge fund worry). The latest weekend comments by the bank’s head of European Strategy, Graham Secker, confirm that despite the market hitting nearly daily record highs on negligible volume, the brokerage refuses to throw in the towel on its cautious outlook despite admitting that the bear capitulation has arrived (something noted last week) and warns that “this is potentially the most dangerous time for investors as hope and greed overtake fear and loathing.”
From the Sunday Start column by Morgan Stanley’s Graham Secker, head of European Equity Strategy
Is the Tide Rising?
It is often said that a rising tide lifts all boats, but perhaps the more pertinent question just now is whether this logic works in reverse. July saw over 80% of European companies post a rise in their share price, and performance has remained strong so far this month.
This breadth of positive returns has been a rare occurrence in Europe in recent years, but does this augur an upturn in economic activity ahead or is it a sign that investor optimism has overreached?
With most global and regional economic surprise indices close to multi-year highs, it does indeed appear that the recent move higher in share prices is backed by better economic data. It is noteworthy that global share prices have been tracking the global economic surprise index more and more closely in recent months to the extent that the 3-month correlation between the two series is up to a blistering 88%. In the current environment good news is good news, we believe, but given this extreme correlation, investors should be cognisant that such surprise indices are mean-reverting by their very nature and that, more fundamentally, traditional economic lead indicators such as PMIs are now stable rather than accelerating. Given our economists’ relatively cautious and below-consensus GDP forecasts, we do not believe it is right to bet on a further rise in economic optimism from here.
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