Welcome to Thoughts on the Market.
I'm Mike Wilson, Morgan Stanley CIO and Chief U.S.
Equity Strategist.
Today on the podcast, I'll discuss how the equity market has been processing recent headlines for months.
It's Monday, March 16th at 1 p.m. in New York.
So let's get after it.
Last week on the podcast, I noted it was clear to me that the current equity market correction began last fall when liquidity first started to tighten.
As soon as funding markets started to show stress from that tightening, the Fed responded by announcing it would end its balance sheet reduction program earlier than expected.
It then followed that up by restarting asset purchases in December.
This pivot subsequently led to better equity performance in January.
It also happened alongside a sharp decline in the US dollar and concentrated returns in emerging markets and commodity-oriented sectors like gold and silver, industrial metals, oil and memory stocks.
More recently, the dollar has rallied, and these same areas have noticeably cooled off.
The key point is that before the attacks in Iran two weeks ago, the correction in equities was already well advanced in both time and price.
In fact, 50% of all stocks in the Russell 3000 are now down 20% from their 52-week highs.
In many ways, we find ourselves in a similar position to last year.
Recall that the major indices started to accelerate lower in February and early March.
The concern at that time was centered around tariffs.
But, like today, equity markets have been trading poorly for months, under the surface, on additional concerns that had nothing to do with tariffs.
More specifically, equity markets have been worried about risks related to DeepSeek immigration controls and Doge.
Tariffs then provided the final blow.
This time around, markets have been worried about AI disruption on labor markets, private credit defaults and liquidity tightness well before the Iran conflict escalated.
Now it's interesting to note, but not surprising, that crude and volatility began to rise in January, signaling the market was ahead of this risk too.
Corrections typically don't end though, until the best stocks and highest quality indices get hit, and that usually takes a capitulatory shock.
Last year, this was Liberation Day.
This time around that event is the Iran conflict and concern about a sustained rise in crude prices above 100 a barrel.
This final corrective phase has begun, in our view, with the SP 500 having its worst two-week stretch since last April.
To be clear I don't expect this capitulation or drawdown to be as bad as last year, for several reasons.
First, last year's events came at the end of what we were calling a rolling recession at the time and effectively marked the end of that downturn.
That means equities were pricing in a recession, at the lows in April of 2025, and that's why the SP 500 was down 20 from its highs.
Second, the current backdrop for earnings and economic growth is much better than a year ago.
Third, fiscal support is much greater today, too.
Specifically personal income tax cuts are flowing through right now, with tax refunds running 17 higher year over year.
Tax incentives in the Big Beautiful Bill should also drive higher capital spending.
Lastly, the Fed is much more accommodated with asset purchases versus balance sheet contraction in 2025.
Bottom line equity markets have been digesting many of the concerns for months that are now hitting the headlines.
We think this means that we are closer to the end of this correction rather than the beginning, and investors should be getting ready to buy any final capitulation that may occur on the next bad headline.
One scenario that might create that final downdraft is a combination of a more hawkish Fed this week on backward-looking inflation concerns combined with triple-witching options expiration.
Or maybe the upcoming trade meeting between the United States and China is delayed or canceled.
Whatever it might be, market lows happen faster than tops, so be ready to add risk in anticipation of the bull market resuming.
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