CIO of Morgan Stanley: The stock market is ‘full of wishful thinking’
Even though the Fed has aggressively raised interest rates to fight inflation, “the stock market isn’t taking the Fed at its word. The stock market is in denial, saying, ‘Ah, they’re just too hawkish; Lisa Chalet, chief investment officer, Wealth Management, at Morgan Stanley argues that, in the end, they will give up.
“But the Fed is signaling unequivocally that they are willing to risk a recession to get the job done,” she adds.
Describing the market as “a roller coaster to nowhere” over the past four months due to high volatility, in the interview, she argued it “remains full of hope that eventually the Fed will realize they’ve done too much and will pause.”
“But the Fed is basically saying, ‘We’re not going to act in a way that pleases the stock market,'” she adds. “We’re going to do what we said we were going to do — and that’s to tame inflation.”
Chalet, who directs Morgan Stanley’s Global Investment Office, provides advice and guidance to clients and advisors regarding long-term goal-based planning and portfolio creation, among other guidance based on the firm’s original research.
She described herself and her team, “We are the advice.”
The Harvard Business School MBA joined the company nine years ago and has been CIO since 2019.
In our conversation, she said the stock market “has this Goldilocks scenario, where the Fed raises interest rates, inflation is tamed and the economy slows — yet corporate earnings are fundamentally sound.
“Our position is that valuations in the market are still unattractive,” she says. “It’s still too high.”
Shalit expects companies to “reset” their earnings forecasts next month.
Until then, “it’s going to be a rocky two weeks,” you might expect.
But she expects the US economy “to prove more resilient than it is.” [government bond] Yield curves tell you — that recession risk is rising.”
In the interview, she also presented her forecast for the core inflation rate by the end of next year.
ThinkAdvisor interviewed Shalit on Wednesday, following Federal Reserve Chair Jerome Powell’s speech at that day’s Federal Reserve meeting.
She was speaking from her office in midtown Manhattan.
In a short sidebar talk about women in financial services, she spoke candidly about why women are “better investors” than men and made her optimistic predictions that more women would become advisors.
Here are highlights of our interview:
The Thinker: When do you expect the stock market to fall?
Lisa Chalet: My crystal ball is not accurate. But the October period for third-quarter earnings will mark a pivotal inflection point as company management has to acknowledge that earnings are at risk.
At this point, we are resetting our earnings forecast. And this is when you can set a more permanent bottom, when expectations are most realistic.
We’re getting close to the calendar, but there are still two tough weeks ahead.
What is your reaction [Federal Reserve Chair] Jerome Powell’s statement today on inflation: “We want to act aggressively now and get this job done, and keep it going.” He announced a significant increase in interest rates by three quarters of a percentage point.
The bond market took it more seriously than the stock market.
The stock market continued to be full of wishful thinking that eventually the Fed would realize they did too much and would pause and turn into a pivot.
How would you describe the Fed’s approach?
They say they are very disciplined conservatives [in essence]We will not act in a way that pleases the stock market. We will do what we said we will do – to tame inflation.
with “plot point” [projection for interest rates] and their growth prospects, they signal the unmistakable seriousness that they are willing to risk stagnation to get the job done.
What is your assessment of the stock market’s activity during the past months?
The market was walking on a roller coaster to nowhere. The truth is that the S&P 500 at 3,789 is still above the June low, which was a typical record low for a bear market.
Yes, bear markets hurt. But are we setting new records? of course not. It’s an incredibly volatile market but has basically been moving in place for the past four months.
What worries investors the most now?
I think the stock market is still full of wishful thinking about the Fed’s behavior, as I said.