“Keep the faith, trust the recovery” and buy stocks.
That, in a nutshell, is the message from Morgan Stanley, where I think it’s fair to say the “V-shape” narrative has been en vogue the majority of the time since April. That narrative has proven to be more or less accurate depending on whose perspective you’re consulting.
The bank’s year-end base case for the S&P in 2021 is 3,900. That’s below Goldman’s 4,300 target and certainly comes across as eminently achievable. US equities were poised for new records Monday on the back of vaccine data from Moderna which Anthony Fauci described as “just as good as it gets.”
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For Morgan’s Andrew Sheets, the global rebound “is sustainable, synchronous and supported by policy.” He also reiterated that the recovery is “following much of the ‘normal’ post-recession playbook,” something he’s emphasized previously against the suggestion that the 2020 downturn is a different animal.
The bank’s 2021 macro outlook, dated Sunday, is chock-full of colorful language celebrating what Morgan pretty clearly believes is a vibrant, sustainable rebound. “A super-charged take-off lifted us back to pre-COVID-19 output levels,” begins the very first paragraph in the summary section that describes “the next phase of the ‘V’.”
Forgive me, but “super-charged take-off” sounds like the kind of hyperbole you might get from a Larry Kudlow. That’s not to disparage anyone. It’s just that the language kind of slaps you in the face right from the start of what, ultimately, is a 40-page piece from the bank.
Seasonally adjusted GDP levels find output recovering to pre-COVID peaks this quarter, Morgan says, on the way to suggesting that from an economic perspective, the pandemic will make no difference in terms of the long-term trajectory of global GDP.
“We expect the recovery to gain further momentum,” the bank wrote, forecasting 6.4% YoY global growth in 2021, a full percentage point ahead of consensus. “Despite the sharp gyrations in economic output over six quarters, the global economy returns to the path it would have followed absent the COVID-19 shock,” the outlook reads.
Morgan’s analysts embrace the notion that their forecast is markedly at odds with less rosy projections, which generally hold that the pandemic’s effects on growth can’t yet be quantified and will likely weigh for years to come.
“This projection stands in stark contrast to the consensus, who worry that the pandemic will have a bigger impact on private sector risk appetite and hence global growth,” the bank wrote.
There is, of course, plenty of nuance. It’s a 40-page tome, after all. For example, Morgan acknowledges that developed markets could indeed face a tough winter due to surging caseloads and the reinstatement of partial restrictions on activity. EMs, on the other hand, should “power on,” the bank says.
I realize the temptation among many will be to suggest this is overly optimistic. I suppose I would note two things in that regard.
First, skimming the outlook finds Morgan’s macro team calling attention to their avowed optimism on any number of occasions. So it’s something they’ve thought through and are apparently quite comfortable with.
Second, optimism has been the correct call depending on whose lens you’re viewing the world through. Obviously, the situation is a disaster for untold millions around the world, and especially for hard-hit demographics in the US and vulnerable citizens in large EMs with acute outbreaks, like India and Brazil. Also, it goes without saying that mass disease and 1.3 million deaths globally is in no way, shape, or form a positive development. Rather, it’s a catastrophe of epic proportions that will be enshrined in the history books.
But, people still have to consider the situation in the context of their own job descriptions. If your job is to forecast macro outcomes and the behavior of financial asset prices, then that’s your lens. Yours is not a humanitarian occupation. And the fact is, the recovery is underway, and thanks to trillions in policy support, financial asset prices have not only recovered, but reached new peaks.
So, that’s where we are, and for the duration of the pandemic, Morgan’s calls have been generally consistent with the evolution of the recovery. Whether or not that remains the case is something that only the passage of time can reveal.
As far as vaccines go, the bank writes that “the recent positive newsflow on vaccine development bolsters our confidence in our constructive views on the economy” and should also “bolster private sector confidence that we can avoid further lockdowns beyond this year’s winter and a full reopening of the economy can be a mid-2021 event.”