Morgan Stanley IM: Equity Market Commentary - February 2023

Here you can find the complete article

As I have repeated often, the only consistency to investing is human behavior. Economic and macro conditions influencing the market change constantly. How we react to those changes really does not.

Accurately predicting how evolving macro conditions will impact the market is virtually impossible to successfully repeat year-in and year-out.

Yet an understanding of these consistent behavioral patterns creates huge investment opportunities for investors who recognize them and have the emotional quotient to capitalize on them. It’s what we on the Applied Equity Team like to call, “the Fat Pitches”.

In my opinion, the consistency of behavior since the October low is about as textbook as it gets.

I believe we are in the process of traveling the four stages of the simple quote from Sir John Templeton in 1966:

“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.”

Overly simplistic? “Andrew, it has to be more complicated than this.”

Maybe not. Consider the following:

1. The lead line of the January 4th Slimmon’s TAKE was “Pessimism is Rampant”. Historically after a nasty 25% decline in the S&P 500, as we experienced in 2022, the odds of a good year for stocks increases exponentially. But most investors did not see it that way.
2. On our January 17th 2023 Market Outlook webcast, we quoted Barton Biggs, as we were convinced, “investors were still fighting last year’s war”. We saw four glaring signals that we believe indicated investors were way too bearish.
3. To me, marking-to-market these four tell-tale behavioral signs from our webcast will assist in understanding what stage we are in today.

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