Where Are We In The Business Cycle: A Troubling Chart From Morgan Stanley

In its 2017 global strategy outlook note titled “Sparkle and Fade”, Morgan Stanley is bittersweet about the future. While on one hand, the bank – which until recent had one of the gloomiest forecasts on Wall Street (a quick walk down Adam Parker’s YTD memory lane should be sufficient) – is now recommending equities and urging the sale of Treasuries and other duration exposure, it also admits that the US is now well into the late stages of the cycle, financial conditions will tighten significantly, and that much more volatility is on the horizon: “by 2Q17, the market will confront a more hawkish Fed, a still-strengthening USD and a renewed moderation in China’s growth. Political reality may also bite, as high expectations for action by the new US administration become hard to meet.”
This is how MS summarizes its recommendations:
“our first theme for 2017 is the need to be flexible; the second is that the distribution of outcomes has grown fatter. The gains in a plausible bull case look larger than before, fueled by the prospect of fiscal expansion, rising earnings and a return of true ‘animal spirits’. But the downside tail has also grown. Cycle models suggest that DM markets are already deep into the final expansionary stage. DM policy easing is coming to an end. The likelihood of booms and busts is far greater. And geopolitical risk looms large.”

This post was published at Zero Hedge on Nov 28, 2016.