Investors are still optimistic about smooth economic growth amid stable employment and continued soft monetary policy by the US Federal Reserve.
It seems that their expectations have substance:
- Major US stock indices hit new highs
- Long-term yield on Treasury bonds declined
- Decrease in overall volatility indicators
According to chief investment officer and wealth management at Morgan Stanley, Lisa Shalett, investors’ expectations are sound. The FRS’s (Federal Reserve System) lending and financial policy’s may continue to fuel investors’ appetite for minimal market risks. It could also bolster the expectation of further cuts in interest rates over the long term.
In addition, Morgan Stanley financiers have noted new growth in market dynamics that will become more evident as the business cycle progresses. This applies to the hotter and, at the same time, shorter phase. It will be marked by economic expansion with the accelerated recovery of the labor market and a surge in the growth of wage funds.
Such a result could lead to a sharp acceleration in the inflation index, which in turn would provoke the Federal Reserve to raise interest rates. Changes can also directly affect the positioning and formation of the investment portfolio.
Morgan Stanley experts’ opinion is based on several underlying factors, including job recovery indicators in the United States.
Experts emphasize that the current recession caused by the Covid-19 pandemic has no analogs in modern history. Therefore, an economic slowdown is not a classic phenomenon. It is not caused by cyclical processes in the economy or deliberate tightening of monetary policy by the regulator.
Meanwhile, the measures and efforts taken to stimulate the economy with the help of monetary policy have helped prevent the growing pace of bankruptcies and systematic credit defaults.
The pandemic has triggered a colossal drop in the US unemployment rate – more than 9.7 million Americans remain unemployed. However, the sharp economic recovery has already led to a massive increase in the employment rate across the country. If we pay attention to the official figures, the unemployment rate fell from 14.7% to 6%.
Experts also draw attention to such an essential factor as the ratio of quality and number of workers. As the economy grows, the American market is witnessing a gradual recovery in production, increasing volumes in the construction and housing industries.
All of this indicates that the economy will continue to create new jobs. This will directly contribute to the further stabilization of the situation.
Salary Growth Drives Inflation Rate Growth
The Morgan Stanley report also indicates that the stimulation of private-sector wage growth is gradually peaking. It has already exceeded pre-pandemic rates. According to experts, this could lead to further cuts in corporate profits and cause further increases in inflation.
Important Tips to Follow
All of the above processes can have severe consequences for investors.
Morgan Stanley financiers recommend:
- Monitor the level of wage payments in the nonfarm payrolls sector
- Further growth of indicators of new jobs may mean positive dynamics and demonstrate a significant increase in employment by the end of the year
- Investors need to be prepared to reposition their investment portfolios, considering changes in inflation rates in the medium term
This article is written on Lisa Shalett’s Global Investment Committee Weekly report from April 12, “For the Love of Labor.”