Since the beginning of this year, the US stock market has rebounded strongly, with the S&P 500 index rising by a cumulative 19% since the beginning of the year. Last month, the US stock market experienced a “crazy November”: the S&P 500 index rose by 8.92% in a single month, setting not only the largest monthly increase since July last year but also the second-best performance for November since 1980.
However, on Monday Eastern Time, Mike Wilson, Chief Investment Officer at Morgan Stanley warned that the United States has entered into late-stage economic cycle. This means that there may be limited upward momentum for US stocks and investors who hope that further interest rate cuts by the Federal Reserve will lead to significant gains in US stocks may be disappointed.
The United States has entered into late-stage economic cycle
Wilson stated that November’s surge in US stocks indicates that investors are becoming increasingly optimistic about prospects for interest rate cuts by the Federal Reserve. However, investors may be too optimistic.
Wilson pointed out that currently, market bets on interest rate cuts by the Federal Reserve are mainly due to expectations of slowing economic growth and recession risks in America. However, these factors also indicate characteristics of entering into late-stage economic cycle. In later stages of an economic cycle, stock market returns resulting from interest rate cuts by Fed tend to be lower than expected.
This situation occurred later in both 2006 and later part of 2018: both times were during late stages of an economic cycle and during these periods future twelve-month stock market returns resulting from Fed’s interest rate cuts were around 14%. Compared with cutting rates early or mid-cycle period within an economic cycle; this return is not considered high.
Wilson cited examples such as those from 1984 when U.S economy had yet to enter its late stage; low-interest environment at that time led to a surge of American stocks over next one year by 25%; a similar situation occurred in 1994 when future twelve-month stock market returns after the Federal Reserve’s interest rate cuts reached as high as 34%.
“In the twelve months following 2006 and later part of 2018, although US stocks have risen, compared with situations in 1984 and 1994, the limited upward momentum brought about by return environment (late-stage cycle) is evident.” Wilson wrote in his report. “In our view, we are currently at late stage of an economic cycle for year 2023. This also explains why large-cap stocks have performed better than overall market this year and why small-cap stocks and low-quality stocks are unlikely to sustain their gains in mid-term.”
Not optimistic about future prospects for US stocks
Wilson also stated that if there were changes in subsequent circumstances, they would be willing to change their current view that the United States is in late-stage economic cycle. However, based on current conditions, the US job market is weakening; employment trend index from The Conference Board has been declining over past year – these are all signs of entering into late-stage economic cycle.
In comparison, during mid-cycle periods such as those seen in years like 1984 and later part of 1994; U.S employment was not weak; The Conference Board’s employment trend index even slightly increased throughout entire year.
Wilson is one of Wall Street’s well-known “big short” investors. He has repeatedly warned this year that the rise in US stocks is only part of a bear market rebound.
Regarding trends for US stocks in year 2024, Wilson is not as optimistic as most analysts on Wall Street. While many analysts bet that next year S&P500 index will reach new historical highs; Wilson still insists that overall stability will prevail for American equities next year with a target price set at around points by end of next year