While inflation soars to a 40-year high in the US and geopolitical conflicts continue to impact global trade routes, analysts at Morgan Stanley are still optimistic about the prospects of the US economy. So far this year, the Dow Jones is down 5% while S&P 500 has fallen more than 6% and the NASDAQ index has tanked 12% as investors gauged various factors such as inflation, US Fed hiking rates, and the geopolitical conflict between Russia and Ukraine. “While the Morgan Stanley Global Investment Office remains cautious in navigating today’s market volatility and understands the complications that the war-induced commodity shock delivers to the global economy, we are far from calling a U.S. recession,” said Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management.
What should investors do
“While we see reasons to be confident about U.S. economic strength, the stark geopolitical and inflationary backdrop means stock and bond markets will likely continue to see volatility, and passive index-level investing remains challenged,” Shalett said. She advises investors to keep an eye on core inflation, which excludes food and energy prices as this will ultimately drive monetary policy and inflation expectations. In terms of stocks, the CIO tells investors to be selective and look for quality names at reasonable prices. “Our focus remains on financials, energy, industrials, healthcare and consumer services,” she added.
US economy still strong
Shedding light on the US economy, Lisa Shalett has listed three reasons why she is optimistic about the same. The first among these is the severity of commodity prices. “Of all the kinds of inflation, commodity-based increases tend to be the most self-curing sort, and thus temporary,” she wrote. The CIO added that analysts at Morgan Stanley have adjusted crude oil prices for aggregate inflation, which shows that oil prices are below that seen in the 1970s and 1980s, in 2006 and as recently as 2012. “Similarly, relative to real assets such as gold and copper, Brent oil is still priced around its 25-year average,” she added.
The increase in energy prices is seen as a major factor that will deliver a $200 billion hit to U.S. consumption, or $1,600 per household, for the year. “That figure is noteworthy, but it pales against estimated excess U.S. household savings of up to $2 trillion. Spending on gasoline has declined 60% as a share of the consumer wallet during the past four decades, which should help subdue the impact of higher prices,” Lisa Shalett said.
Further, the US is importing just 5% of total energy consumption today. Morgan Stanley analysts believe if the country can return to its 2014 productivity while improving well productivity could meaningfully offset the current situation. The US government has sanctioned Russia which has forced many US allies to move away from Russian oil while prices have skyrocketed.