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Andrew Sheets, Chief Cross-Asset Strategist at Morgan Stanley, discusses the case to be more optimistic in the near-term and why he thinks this remains a bull case outcome rather than his base case expectation. The strategist breaks this story down along three main themes: economic fundamentals, market valuations and supply versus demand.

Key quotes

“On economic fundamentals, the near-term bull case is that global economic data will continue to recover and really shrug off any new Autumn resurgence of the Coronavirus. We think the economic recovery has been greatly aided by government stimulus; stimulus that in the US may soon start to run out. As of this recording, there was still no sign that more federal spending would be on the way.”

“The US and global equity markets are now trading near their recent valuation highs in price-to-earnings and other metrics. And this is probably the most worrying element of today’s market. But current valuations are also very bifurcated, with stocks in high growth segments like technology, very expensive, and other parts of the market, far more average versus history. The bull case is that the expensive parts of the market can manage to hang on to the valuations they have, and the rest of the market can see its valuations go higher.”

“The strongest argument for continued market strength is likely the idea that there remains a lot of ‘cash on the sidelines,’ so to speak. Central banks are continuing to buy assets in large numbers. Investors raised a lot of cash during February and March, as the virus hit, that they haven’t fully put back into the market. The optimistic case is that this money finally relents and buys into the market in the face of heavy central bank intervention.”

“In the near-term, we simply think that people could hold onto their cash a little while longer. Whether it’s the uncertainty over further government stimulus, or the coming US elections, or US-China trade tensions, or simply how the virus will evolve as schools try to reopen, there remain a host of uncertainties. With investors now enjoying year-to-date gains across many asset classes, they simply may not try to push their luck.”