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- Morgan Stanley managing director Andrew Slimmon views the recent outflow from stocks and President Trump’s reelection bid as an opportunity for investors to ride another market boom before recession hits.
- Recent quarterly earnings figures established a low bar for year-over-year profit growth, and should help companies beat expectations in coming quarters, Slimmon said.
- The Treasury yield curve "would’ve inverted a while ago" if an economic recession was set to hit in 2019, the director added. Yield-curve inversions historically arrive several months before an economic downturn begins.
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Just as a shoreline recedes before a tidal wave, Morgan Stanley managing director Andrew Slimmon sees the recent outflow from stocks as opportunity for a new market boom.
Slimmon — a senior portfolio manager at Morgan Stanley Investment Management, which oversees more than $470 billion — views a recent earnings recession as setting a lower hurdle for companies to clear in 2020.
The summer brought consecutive quarters of year-over-year S&P 500 earnings declines for the first time since 2016. Mutual fund and exchange-traded fund investors have also sold stocks and bought bonds for four weeks in a row as trade tensions fuel uncertainty, according to Bank of America Merill Lynch.
The lagging profit growth and move away from stocks could spark a huge market run-up when traders pour cash back into the stock market, Slimmon said.
"2019 made for a very low bar and we’re going to have positive earnings growth next year," he said in a phone interview.
Slimmon also sees President Trump as a key player in keeping stocks rising in 2020. Tanking markets would reflect poorly on the president as he runs for reelection, and there’s no incentive for him to bring aid to markets now when he can quash uncertainty closer to election day, the director said.
The trade conflict "will be dragged out until he gets the Fed to cut rates," Slimmon predicted, adding a trade deal between the US and China could come "early next year" to boost markets ahead of the election.
The trade war — and its effect on consumer sentiment — is the most relevant variable in deciding when recession arrives, Slimmon warned. Consumer spending makes up about 70% of the US economy, and indicators like the unemployment rate and consumer sentiment will signal how much the trade conflict and resulting tariffs are changing Americans’ spending habits.
The US Labor Department announced slower hiring trends in August Friday, adding 130,000 nonfarm payrolls against economist expectations for 160,000 new jobs. White House economic adviser Larry Kudlow praised the economy for a "very solid number" of job gains Friday.
"August is always a quirky month," Kudlow said in a CNBC interview. The adviser said strong wage growth and a high rate of Americans returning to the work force paint a rosy picture for the nation’s economy.
Federal Reserve chairman Jerome Powell also spoke well of the nation’s economy, saying the central bank is "not forecasting or expecting a recession" during a Friday speech in Zurich, Switzerland.
The officials’ statements follow repeated "2-10" yield-curve inversions, one of the most dependable recession warning signs over the last six decades. The first of said inversions arrived August 14 and brought the worst day of the year for US stocks.
Though the inversion triggered recession fears across the nation, Slimmon noted there’s plenty of time before recession hits and stocks tumble. Stocks on average rise 15% after a yield-curve inversion, according to a Credit Suisse report. The report also noted economic downturns can arrive as far out as 34 months after an inversion.
If a recession were to hit in 2020, the first inversion should have arrived several months ago, Slimmon said. The official definition for a recession is two consecutive quarters of falling GDP. Slowing GDP growth through 2018 set a lower bar for the economy to clear, the director said.
"The yield curve would’ve inverted a while ago if we were going to have an economic recession now," Slimmon said. "We didn’t print a lot of very high GDP numbers last year, therefore I think a recession in 2019 is very unlikely."
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