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One of Wall Street’s most notable bears finally reversed this week.
Morgan Stanley’s Mike Wilson raised his price target for the S&P 500 over the next 12 months from 4,500 to 5,400, although Wilson said the market is defined by “higher than normal uncertainty.” The market price rose by 20%. Josh Schafer tells more about Wilson’s call here.
And in his report, Wilson included a chart that serves as a warning to stock market bulls looking to lower interest rates for the next bull market.
”[There] “Since the beginning of the logging cycle, there have been a variety of benefits throughout history,” Wilson wrote.
“In many ways, this analysis nicely summarizes our outlook: a balanced risk/reward profile from an average/baseline perspective, but a variety of scenarios are likely to play out. Once again, be prepared for some notable fluctuations in sentiment, positioning and pricing. ”
The average annual return for the S&P 500 is about 10%, and the average 12-month return after the rate cut is well below this bogey. And with the exceptions of 1974, 1989, and 2019, the S&P 500’s previous-year returns after rate cuts have typically been well below this historical average, both at high and low points.
All else being equal, lower interest rates benefit riskier assets like stocks, lowering the bar for return and favoring stocks over things like bonds.
But Wilson’s data reminds us that the Fed typically doesn’t cut rates “just because.”
Even a triumphant year on Mr. Wilson’s chart is a reminder of a volatile moment in the history of financial markets. The 1994 bond market crash sparked James Carville’s famous complaint about “bond vigilantes,” and the 1998 emerging market crisis and LTCM failure forced the Fed to take drastic action. Ta. Action to save a single hedge fund.
Going back 18 months, Wall Street expected the recession to prompt interest rate cuts. The Fed is now seeking “further confidence that inflation is sustainably declining toward 2%” as a trigger for rate cuts.
Last year’s view on rate cuts was consistent with history: negative shocks would prompt the Fed to move. The current view is abnormal.
But as Wilson points out, what else would you expect in today’s market?
“The last few months have been a microcosm in this respect, with economic growth data booming but then cooling off again and inflation data being volatile,” Wilson said.
“In short, as data becomes more volatile, macro outcomes are becoming increasingly difficult to predict. We see this environment continuing.”
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