Since the beginning of this year, the US stock market has rebounded strongly, with the S&P 500 index accumulating a 19% increase. Among them, last month the US stock market experienced a "crazy November": the S&P 500 index accumulated a monthly increase of 8.92%, not only the largest monthly increase since July last year, but also the second best November performance since 1980.
However, on Monday Eastern Time, Mike Wilson, the head of investment at Morgan Stanley, warned that the United States has entered the end of its economic cycle, which means that the gains in US stocks may be relatively limited. Investors who hope the Federal Reserve's interest rate cut will bring about further significant gains in US stocks may be disappointed.
The United States has entered the late stage of the economic cycle
Wilson said that the sharp rise in the US stock market in November indicates that investors are increasingly optimistic about the prospect of the Federal Reserve cutting interest rates. However, investors may be overly optimistic.
Wilson pointed out that currently, the market's bet on the Federal Reserve's interest rate cut is mainly due to the belief that the US economy is slowing down and facing recession risks, but this is also a characteristic of the later stages of the economic cycle. In the later stages of the economic cycle, the stock market returns brought about by the Federal Reserve's interest rate cuts are often lower than expected.
This situation occurred in both 2006 and later 2018: both were in the later stages of the economic cycle, during which the Federal Reserve's interest rate cut resulted in a stock market return of approximately 14% for the next 12 months. Compared to interest rate cuts in the early and middle stages of the cycle, this rate of return is not particularly high.
Wilson cited the situation in 1984 as an example: at that time, the US economy had not yet entered the late cycle, and the low interest rate environment at that time caused the US stock market to soar by 25% in the following year; The situation was similar in 1994, when the Federal Reserve cut interest rates and the next 12 months saw a high return on US stocks of 34%.
"In the 12 months after 2006 and 2018, despite some gains in the US stock market, the return environment (late cycle) of the former had limited upward momentum compared to the situation in 1984 and 1994," Wilson wrote in his report, "In our view, 2023 is in the later stages of an economic cycle. This also explains why large cap stocks have performed better than the broader market this year, and why the upward trend of small cap and low-quality stocks is unlikely to continue in the medium term."
Not optimistic about the future of the US stock market
Wilson also stated that if the situation changes in the future, they are willing to change the current view that the United States is in the later stages of the economic cycle. However, from the current situation, the employment market in the United States is weakening, and the Employment Trends Index of the American Economic Consultative Conference has been continuously declining in the past year, which is a manifestation of the economic cycle entering the later stage.
In contrast, the situation in the mid cycle of 1984 and 1994 was different. At that time, employment in the United States was not weak, and the Employment Trends Index of the American Economic Consultative Conference had slightly increased throughout the year.
Wilson is one of the well-known "big bears" on Wall Street. He has repeatedly warned this year that the rise of US stocks is only a part of the bear market rebound.
For the 2024 US stock market trend, Wilson is not as optimistic as most investment bank analysts on Wall Street. Against the backdrop of many analysts betting that the S&P 500 index will reach a historic high next year, Wilson still insists that the US stock market will remain generally stable next year, with the S&P 500 index set at a target price of 4500 points at the end of next year.