Market Watch: Why Stock Market Rally May Be Nothing More than 'Wishful Thinking,' According to Morgan Stanley CIO

Article by Joy Wiltermuth in Market Watch

Listen to the bond market!

That is the advice from Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warning that recent resilience in stocks could be “nothing more than a bear-market rally, fueled by wishful thinking and excess liquidity,” in a Wednesday client note.

“After a volatile first quarter, U.S. stock and bond markets have been telling differing stories,” she said, pointing to continuing steep losses in the Treasury market, as yields rise and bond prices fall, but also its recession signals from a brief yield-curve inversion.

“Such aggressive tightening will make the Fed’s policy execution highly complex, and historical examples suggest that even when the central bank does manage to land the economy softly, markets often feel a much harder impact,” she wrote.

Perhaps stock market investors could be also dismissing the longer-term prospect of rising “real” interest rates, and other potential headwinds from Russia’s war in Ukraine, including the threat of a U.S. economic slowdown or recession in Europe.

Instead, Shalett thinks “more cautious signals coming from the bond market may better reflect the likely path ahead.”

After quickly climbing to the highest since early 2019, the 10-year Treasury yield eased back slightly to 2.688% on Wednesday.

“We look for risks to get more rationally priced and believe investors should watch .......

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