Morgan Stanley IM: Is All News Really Bad News? What May Happen Next in Markets

• Call us skeptical that all news is bad news. We are also wary of the rapidly changing narratives that the market is clutching onto as it swings from one monkey bar to the next.
• It's hard to time things perfectly, but we see inflation moving lower and the narrative for the terminal policy rate to eventually settle at 5.25%. If there's risk to this view it's to the upside, but not higher than 5.50%.
• Why is this important? Because the sharp selloff in assets is based on a narrative of rising inflation and tighter policy. If this proves false, or if a more balanced narrative emerges - let alone one in which inflation falls (as we think it will) - then we see it as a sharp positive for asset prices.
• Fixed income assets just reset and gave up most of this year's gains, perhaps making now a better entry point. Near 9% High Yield and Emerging Market yields do seem attractive for what we think will be a soft landing with low default risks.
• A stabilization of inflation and policy risks may also be friendly to equity markets. Don't underestimate the high cash levels that will chase returns.
• Once again, a balanced approach like ours, one that allocates across a combination of stocks and bonds, all within in a risk-controlled framework, may be ideal for this choppy environment.

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^{Risk Considerations}

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