Morgan Stanley (MS, Financial)'s analysts have been banging the drum on an economic slowdown for months now. In particular, they have drawn attention to a slowing business cycle and falling corporate margins and profits. They also believe that investors are scapegoating trade tensions and the Federal Reserve’s recent interest rate activity, and are ignoring deteriorating fundamentals. A research note from the bank this week discusses a possible way for the U.S. to combat recession -- fiscal stimulus.
Recession are natural
It’s important to note that the bank does not believe in using policy to avoid a recession -- far from it. It is its view that recessions are an integral part of any market, and serve a fundamental role:
“Recessions are the natural way to remove excesses in the real economy. If we don’t let nature run its course, even worse outcomes are likely to occur as evidenced by the financial crisis experienced ten years ago. In addition to the blame game, there does seem to be growing support for more fiscal, rather than monetary policy, something I’ve been advocating for years, and one of the reasons I was originally so bullish on the tax deal before it passed in December 2017.”
The note acknowledges that with political polarization at an all-time high, securing congressional unanimity on a fiscal stimulus package at this moment in time seems unlikely. Democrats are hardly in the mood to give President Trump an excuse to declare a win going into an election year. However, if the recent financial turmoil bleeds into a full-blown economic recession, that could force the Democrats’ hand:
“In that case, there will be enough pressure on Congress to enact policy that will help the average American, like an infrastructure bill, or more tax breaks for the middle class. Therefore, we shouldn’t fear a recession, just like thinning out an overgrown forest can prevent very damaging wildfires, a recession may avoid a real crisis and find the next avenue of sustainable growth and policy.”
In any case, we should probably expect things to get worse before they get better. It’s not hard to foresee a "blame game" scenario as the White House and Congress trade blows while the economy deteriorates. What does this mean for investors? The note continued:
“With an economic recession now looking more likely based on the incoming data, we continue to recommend patience with one’s investments. As a reminder, we think the markets have already discounted 75% of the recession risk, but we would prefer to wait until the mainstream is actually acknowledging this risk for what it is, before positioning portfolios for the next growth cycle.”
In other words, now is not the time to be buying stocks priced for growth. I believe that in the coming months more opportunities to deploy capital will make themselves known, and value investors will finally have a chance to shine.
Disclosure: The author owns no stocks mentioned.
Read more here:Ă‚
What Exactly Is the Trump Administration’s Trade Policy?Â
The US Economy Is Becoming More Concentrated. Why? Part 3Ă‚
The US Economy Is Becoming More Concentrated. Why? Part 2Ă‚
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