According to Yahoo News, the current stock market landscape is similar to that of 2006, and investors hoping for rate cuts to fuel a significant rally in stocks may be disappointed, warns Morgan Stanley's Chief Investment Officer Mike Wilson. He noted that the S&P 500 has risen 19% since the beginning of 2023, with November marking its best performance of the year, as investors grow increasingly optimistic about potential rate cuts from the Federal Reserve.
However, Wilson cautioned that markets are anticipating rate cuts during the late stage of the business cycle, a period when growth typically slows down and the economy risks entering a recession. This could result in smaller-than-expected returns for stocks as the Fed lowers interest rates. Wilson cited the 2006 and 2018 late-cycle rate cuts, which led to approximately 14% returns in stocks over the following 12 months, as examples of this dynamic.
In contrast, early- to mid-cycle rate cuts have historically led to larger returns, such as in 1984 when stocks surged 25% in the year following a rate cut, and in 1994 when stocks returned 34% after a rate cut. Wilson and his team at Morgan Stanley remain open to revising their late-cycle thesis but point to weakening labor market conditions as evidence supporting their current view. The Conference Board's Employment Trends Index has declined over the past year, which is inconsistent with mid-cycle years like 1984 and 1994 when the index experienced slight increases.