Analysts from Morgan Stanley’s equities team believe that US stocks have reached a tipping point, stoking fears of an end to a 10-year trend in increasing growth stocks.
Markets define growth stocks as companies with potentially high future capital returns, in contrast to value stocks trading at lower prices relative to earning potential, Business Insider reported on Wednesday.
Morgan Stanley made the observations after US bond yields spiked last week, causing a major selloff in global stocks. Analysts also predict that US bond yields will rise further as the Fed continues to raise interest rates, creating an “end-of-cycle risks into focus” while “capping equity market valuations,” Morgan Stanley stated.
This indicates that rising interest rates and higher yields will bring the US economy to a standstill, despite years of fiscal stimulus and Trump administration tax cuts.
Morgan Stanley continued, saying that “before this occurs, it appears we will get a final spike higher.” In relation to stocks, adding that the Standard and Poor 500 (S&P500) reacted negatively to spike yields with similar large-scale selloffs in early February.
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Stock gains have been driven by three sectors since January — tech, consumer discretionary stocks, and health care-with the tech industry starting to “correct in the past month,” leaving “discretionary and health care as the real outliers now,” Morgan Stanley’s equities team stated.
However, stock sectors are shifting towards energy, financials over tech, and discretionary stocks. Utilities, an unorthodox option during periods of rising rates, may offer steady returns on profit similar to bonds.
Effects on the Wealth Management Industry
Rising interest rates and bond yield have caused the US wealth management industry to capsize, with international hedge funds recording three-year lows at Q3 in 2018, Sputnik’s Kristian Rouz reported.
Higher rates have caused investor interest to plummet towards acquiring safe-haven assets and move towards higher-yield, non-financial opportunities, a Hedge Fund Research Inc. report said.
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Kristian Rouz noted that San Francisco-based Criterion Capital Management, which manages roughly $2 billion in assets, closed its door permanently after 16 years of business due to unfavorable markets. Boston-based Highfields Capital Management also shut down after conducting business since 1998.
Trends like this are forecasted to continue as hedge fund managers shift their portfolios away from growth sectors, with Morgan Stanley’s equities team stating, “We suspect other asset allocators who have remained overweight US growth equities may now be forced to consider making a switch.”
Morgan Stanley stated that once the US economy begins to slow, investors could move to more defensive stocks sooner than expected as a bearish market looms next year and tax breaks wear off. “Our concern lies with the fact that 2019 consensus forecasts do not anticipate such a dynamic at all,” the equities analysts said.
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Despite this, investors remain optimistic after US Federal Reserve chairman Jerome Powell reported in early October stronger GDP growth and bond yields, as well as record-low unemployment. Powell noted that the current business cycle had passed the average 10-year lifespan, leading positive speculation on US markets to a period of uncertainty, with overvalued property and stock markets, high household debt, and uneven economic growth persisting in the US economy.