Morgan Stanley indicator flips, investors should brace for market turmoil

Morgan Stanley’s cross-assets team says their cyclical indicator has flipped to “downturn" from “expansion," a shift that has historically led to weaker returns for stocks and other risky assets, along with an elevated chance of a recession, Marketwatch reported.

With U.S. data still above-average but deteriorating, our cycle indicator has shifted out of ‘expansion’ to ‘downturn’ for the first time since 2007

, wrote Serena Tang, a cross-assets strategist, adding that its downturn phase indicates when the improvement in economic data has started to slow or weaken outright.

Morgan Stanley’s cyclical indicator aggregates economic and financial markets data, including the yield curve’s slope, consumer confidence and debt issuance. In particular, credit issuance, consumer confidence and manufacturing gauges have started to soften in recent months.

The good news is that investors still have some time before they start to undergo serious pain as lower returns come mostly at the back-end of the 12-month period following the entry into the ‘downturn’ phase.

Tang points out that Morgan Stanley’s cyclical indicator flashed a ‘downturn’ as early as November 2006, when U.S. equities were still on the rise before they embarked on their spectacular tumble as a financial crisis slammed the global economy.

Nevertheless, the gloomy backdrop for global trade along with elevated equity and corporate bond valuations means investors shouldn’t take any chances and start to cut down their holdings of risky assets now, said Tang.

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