Morgan Stanley IM: 2023 Will Feel Worse on Main Street than Wall Street

• Friday jobs data showed YoY wages falling, but with steady jobs growth and a drop in the unemployment rate.
• Is falling wage inflation without a deterioration in the labor market a win for policy makers? Perhaps, if you use Wall Street (asset markets) as a barometer.
• What about Main Street though? Inflation is near 7% and wages are starting to fall, and while job gains were strong, a closer look reveals they were lower quality, lower paying jobs.
• The Fed’s design to lower inflation will eventually hurt labor markets – just look at the layoffs recently announced by large corporations. Main Street may end up consuming less, leading to declining profit margins if corporations cannot easily raise prices.
• As discussed, we see fat-tail risks on both sides of the risk distribution, which may keep volatility elevated. In the end, this is likely what a bumpy landing feels like.

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^{Risk Considerations}

^{Diversification does not eliminate risk of loss. 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 that the value of portfolio shares 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. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities are sensitive to early prepayment risk and a higher risk of default, and may be hard to value and difficult to sell (liquidity risk). They are also subject to credit, market and interest rate risks. Certain U.S. government securities purchased by the Strategy, such as those issued by Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. It is possible that these issuers will not have the funds to meet their payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).}