Michael Wilson: The great profits smash has begun

The excellent Michael Wilson at Morgan Stanley

Month-End and the Fed

2023 is off to a much better start than most (includingus)expected when we entered the year. As described in our first note of 2023, many investors had adopted our Fire and Ice narrative. Fast forward 3 weeks and that view has changed almost 180 degrees, with most clients now adopting the new, more positive narrative of China reopening, falling inflation / dollar and possibility of a Fed pause right around the corner. While we acknowledge these developments as real, net positives, we remind readers that these were essentially the exact same reasons we cited back in October when we turned tactically bullish. However,at that point, the S&P 500 was trading 500+ points lower with a P/E that was almost 20% lower than today. In other words, this new narrative that seems to be gaining wider attention has already been priced, in our view. In fact, we exited our tactical trade at these same prices in early December. What’s happening now is just another bear market trap, in our view, as investors have been forced once again to abandon their fundamental discipline in fear of falling behind or missing out. Exhibit 1 shows active investment managers are once again adding risk aggressively. Interestingly, it appears to be having even less impact on price at this point, with the gap between the blue and yellow line widening. The analogy would be that it is taking more fuel every time we try to get the rocket off the ground.