Morgan Stanley’s Chief Investment Officer, Mike Wilson, highlights a familiar scenario, suggesting that the current stock market landscape mirrors conditions seen in 2006. However, Wilson cautions investors, stating that counting on Federal Reserve rate cuts to replicate the impressive stock gains of the past might lead to disappointment.
Wilson draws attention to the notable 19% surge in the S&P 500 since the beginning of 2023, particularly after a robust performance in November. While investors eagerly anticipate rate cuts from the Federal Reserve, Wilson emphasizes that historical patterns indicate that late-stage rate cuts during a slowing business cycle might not yield the substantial returns some hope for.
Drawing parallels to 2006 and 2018, Wilson points out that late-cycle rate cuts during those years resulted in approximately a 14% return in stocks over the subsequent 12 months. In contrast, early- to mid-cycle rate cuts, such as those in 1984 and 1994, generated more significant returns, with a surge of 25% and 34%, respectively, in the year following the rate cuts.
In a note on Monday, Wilson shared his perspective, stating, “The 12 months following 2006 and 2018 offered attractive returns, but those return environments (late cycle) look modest when compared to the 1984 and 1994 instances.” He further emphasized that 2023 appears to be in a late-cycle period, which explains the outperformance of large-cap quality stocks. Wilson is skeptical about the sustainability of the recent rally in small caps and lower quality stocks in the intermediate term.
While Morgan Stanley remains open to adjusting its late-cycle thesis, Wilson points to concerning signs in the labor market, notably the decline in the Conference Board’s Employment Trends Index over the past year. This trend contrasts with mid-cycle years like 1984 and 1994, where the index experienced a slight increase.
Mike Wilson, known for his bearish outlook, has consistently warned of a bear market rally throughout the year. In his 2024 outlook, he predicts that stocks will remain relatively flat in 2024, diverging from other banks’ expectations of a new all-time record for the S&P 500.
