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Morgan Stanley: “The Market Gets It” That Trading Is About To Get Much More Difficult: Here’s Why

One week after Michael Wilson presciently warned that the recent breakdown of small caps was “a warning sign that the reopening would be more difficult” than anticipated by the market…

… while also cautioning that “the underperformance in IPOs and SPACs is a signal that the excessive liquidity provided by the Fed is finally being overwhelmed by supply“, Morgan Stanley’s chief equity strategist has published a fresh warning that markets are about to hit some potentially major turbulence as the “rising cost pressures/supply shortages, the definitive peak rate of change on economic data and earnings revisions and demand being overwhelmed by supply are all contributing to the deterioration in lower quality, smaller capitalization, and the more cyclical parts of the market.”

Wilson then points out that the market “gets” the approaching headwinds, which explains why “IPOs and SPACs have also been trading poorly for the past few months” and which in Wilson’s experience “is an early warning sign on real-time liquidity dynamics.” As such, Morgan Stanley continues to recommend “moving up the quality curve and skewing more defensively as earnings season proves to be a sell-the-news event.

Picking up on what Goldman said overnight, namely that it now appears that the best of the economic surge is now behind us (and markets are starting to price it in), Wilson noted that while “over the past few weeks, economic data has been nothing short of spectacular” it’s really not that much of a surprise, at least relative to expectations. And, to Wilson that’s what ultimately matters for investors. Furthermore, as shown in the chart below, “many data series are peaking from a rate of change standpoint. In fact, the rally in bonds over the past few weeks has surprised many but the reality is that these strong data were well understood by markets.” As the MS strategist explains it simply, “if rates didn’t move up on the back of record economic data surprises last year, it’s not hard to see why they didn’t react more to the strong data of the past few weeks when it wasn’t such a surprise.”

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