The chief investment officer of Morgan Stanley issues a warning that risks will be exposed, beware of the third and fourth quarters of this year...
Morgan Stanley's Chief Investment Officer Mike Wilson said that the evolution of the US labor market will determine the success or failure of US stocks, and any sudden weakness in the former could trigger a meaningful adjustment in US stocks.
Wilson stated that if the increase in labor force starts to decrease, it will eliminate the prospect of a soft landing for the US economy and may prompt the Fed to cut interest rates. As the current rise in the stock market is driven by hopes for the 'blonde girl', if this outlook collapses, it will be enough to cause a 10% drop in the stock market. Wilson said:
What is the key factor leading the market to worry or even fear recession about the US economy? It's the labor market.
He said that if the non-farm employment number falls below 100,000 or the unemployment rate rises above 4.3%, economic slowdown will be obvious.
But one thing can be certain is that at least one of the two is still far from the threshold set by Wilson. In May, non-farm employment soared to 272,000, exceeding market expectations. More broadly, cracks are starting to appear. The May unemployment rate finally broke through 4%, and the underlying recruitment trend shows mixed signals of good and bad.
Wilson stated in a recent report that this is important for US stock investors because the market is increasingly guided by the trajectory of economic growth, rather than inflation and interest rates.
He pointed out that for this reason, it is reasonable for the current market to be at a high level because investors are buying high-quality growth trades. He added, 'The question is, are the PE ratios of these specific stocks too high now? I think if the Fed can achieve a perfect soft landing, there will be no problem. But if there is any deviation, it will be a problem.'
Wilson said that there are currently three main abnormal risks in the US stock market, and the most likely one is the slowing down of the US economic growth. Inflation rebound or a surge in US Treasury yields are the other two threats. If investors feel uneasy about federal debt, US bond yields will rise.
Wilson also pointed out that the risk of the labor market will not immediately occur but is likely to be exposed in the third or fourth quarter. He said that once this situation arises, not only the leading tech stocks will suffer.