Morgan Stanley IM: Equity Market Commentary - August 2023

Here you can find the complete article

We listen to you!

One of the many aspects of this business I love is the relationship between corporate fundamentals and behavioral finance and its net impact on stock prices. Anyone who follows us is likely aware of that.

As it pertains to corporate fundamentals, my team and I spend a huge portion of our day listening to calls, reading reports, and analysing companies.

On the behavioral side, I am enormously fortunate to have such a great group of readers who are on the front lines working with clients directly. I greatly value their feedback.

What does that have to do with this Slimmon’s TAKE?

1. Last month, I released a Market Alert warning of the dangers of August/September seasonality. The equity market was up significantly year-to-date; sentiment and complacency (lack of volatility) had soared; and the riskiest stocks had performed the best. This is never a good sign, particularly as we enter the slowest corporate news flow period of the year.
2. However, as I said then, “talk is cheap.” Watch what people do, not what they say. As much as retail investors say they are more bullish; they are not acting upon it. Easy to see, simply by going to the Investment Company Institute website and looking at ETF and mutual fund flows.¹
3. Anecdotally, the #1 most frequently asked question I have received this year is: “When is the correction coming? I have cash to invest.”
4. Therefore, I have questioned how much of a correction the market will provide when so many want a good entry point. Won’t pullbacks offer an opportunity for that cash on the sidelines to be invested, thereby cushioning the downside?
5. Yet, while institutions have increased their equity allocations (hence why the market has rallied), retail is traditionally last to the party. The data tells us they have not shown up yet.

When Leslie or I receive consistent feedback from those of you on the front lines, we listen:

1. Here is a portion of an email response to July’s Market Alert I received:
   
   Andrew, FOMO (Fear of Missing Out) amongst my clients is not in equities, it’s in bonds.
2. Here’s the summary of a conversation Leslie had:
   
   He disagreed with Andrew on one point from the Market Alert. He thinks clients are happy with a 5% savings return, and until the Fed eases, they won’t move cash into equities.

Those are just two of many comments.

Let’s rewind back to February 2021 when, after 11 months of selling equities off the covid-lows and a 66% rally in the S&P 500, retail fund flows turned positive. Investors decided to show up to the party.

Now, fast forward to last year’s bear market. Flows turned consistently negative in September 2022 and have remained so despite a 26% rally off the October 12th, 2022, low.²

Therefore, I assumed that given we are nearing the one-year anniversary of “selling after a bear market”, it was time for investors to flip, as they did in 2021.

Here you can find the complete article

^{RISK CONSIDERATIONS}

^{There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. Natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. Portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.}