Morgan Stanley Calls for Defense Play as Cycle Indicator Flashes “Downturn” that Historically Led to Lower Returns


  • Experts call for a Defensive stance: Abandon stocks in favor of cash and Treasury
  • Bond Yields are inverted: A strong sign that the US economy could be about to take a turn for the worse.

Investors need to get ready and brace themselves for the market turmoil in the coming 12 months.

This warning has come from Morgan Stanley’s cross-assets team, their cyclical indicator has shifted to “downturn” from “expansion.” Historically, this flipping led to weaker returns for stocks and other risky assets with an increased chance of a recession.

In a note on Sunday, the bank advised the market participants to go on the defensive and abandon US stocks in favor of cash and Treasury.

“With U.S. data still above-average but deteriorating, our cycle indicator has shifted out of ‘expansion’ to ‘downturn’ for the first time since 2007,” wrote Serena Tang, a cross-asset strategist.

“With the cycle indicator in ‘downturn’, together with still-rich valuations and increasing uncertainties about trade tensions, we reiterate our call for a defensive stance,” added Tang.

The cyclical indicator of the investment banks aggregates financial markets and economic data along with consumer confidence, debt issuance, and the yield curve’s slope. In recent months, consumer confidence, manufacturing gauges, and credit issuance have started to weaken.

However, investors have some time left before the pain comes as lower returns mostly come at the end of the 12-month period following first entering into this “downturn” phase.

US Economy could be about to take a turn for the worse

The cycling indicator Tang points out flashed a “downturn” as early as November 2006 when US equities were on the rise before they tumbled down as a financial crisis hit the global economy.

Nonetheless, the gloomy backdrop for global trade and elevated corporate bond and equity valuation should have the investors not taking any chances and start cutting down on their risky asset holdings.

We are already seeing the trade spat between the US and China that keep on escalating putting credit markets and stocks under pressure and renewing fears of making a dent in the momentum of the global economy. Now, Trump has made a tariff threat against Mexico, India, and further administration is contemplating imposing import levies on Australia.

The Dow Jones Industrial Average and S&P 500 have already posted more than 6% loss in May.

Last month while traditional markets fell, Bitcoin and cryptocurrencies enjoyed a big rally with the leading digital currency registering a whopping 60 percent gains. This is to be seen if a big crash in the traditional markets this time will lead to even bigger gains for Bitcoin which is on its another bull cycle approaching reward halving.

Though Bitcoin has a long way to achieve the status of a store of value, given the fact the faith in fiat system is still here in the global market. However, with Bitcoin outperforming other assets, it is surely seen as a lucrative investment option.

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