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Morgan Stanley said ideally the Fed would cut rates by half a percentage point without raising concerns about growth.
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Chief Investment Officer Mike Wilson said the bond market was acting as if the Fed was playing catch-up.
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He said it was worth holding defensive and blue-chip stocks after Wednesday’s rate cut.
Wall Street is bracing for a major interest rate cut announcement on Wednesday, but there is still uncertainty about how far the Federal Reserve will go.
As of Monday morning, CME FedWatchTools Markets are pricing in a 59% chance of a 50-basis-point cut, which would be the best outcome for stocks, according to new research from Morgan Stanley, with a caveat: Any cut would need to be limited to just half a percentage point. and Stop the market from worrying about economic growth.
“In the very near term, we think the best-case scenario for stocks this week is that the Fed can deliver a 50 basis point cut without triggering growth concerns or an unwinding of the yen carry trade — a purely ‘insurance cut’ in the face of macroeconomic data that we expect to stabilize,” Chief Investment Officer Mike Wilson wrote in a Monday note.
In the months leading up to the Federal Reserve’s policy meeting this week, weak labor data has led investors to believe the central bank will need to start cutting borrowing costs to avoid an economic downturn.
In Morgan Stanley’s view, the Fed may want to cut rates by 50 basis points because the bond market is signaling that monetary policy is overdue, and there is a risk that if interest rates remain high for a long period of time, this will have some negative effects on the economy.
at the same time, Some analysts point out Aggressive rate cuts could be the Fed’s way of acknowledging the economy’s difficulties.
Ahead of the rate cut, Morgan Stanley suggested investors increase exposure to two classes of stocks that have historically outperformed in similar environments: defensive and high-quality stocks.
Part of the reason is growing concerns about growth. While the S&P 500 Index is signaling strong confidence that the Fed will deliver a soft landing and 15% earnings per share growth through 2025, market insiders are seeing things differently. Investors are Investing in defense stocks Afraid to slow down.
In this context, Wilson noted that the performance of defensive stocks versus cyclicals has been the strongest since the last recession. Defensive stocks include sectors such as utilities and consumer staples. — A group that is less dependent on macroeconomic conditions to perform well.
“Defensive stocks tend to outperform cyclicals fairly persistently both around rate cuts. Large caps also tend to outperform small caps around the first Fed rate cut. Since Fed rate cuts tend to come later in the economic cycle, the movement of these last two factors supports our bias towards defensive and large cap stocks,” Morgan Stanley said.
Read the original article Business Insider
