S&P 500 Index: Rising rates indicates a serious shift in market outlook – Morgan Stanley

Just two weeks after hitting a high of 3948 on February 16, the S&P 500, has fallen 3.5%. For some, that may seem like the kind of moderate dip that could be a buying opportunity, but strategists at Morgan Stanley don’t believe that’s the case right now.

Key quotes

“If the economy returns to its pre-pandemic growth trend well ahead of Fed forecasts, the timetable for interest-rate hikes could accelerate.”

“While Fed Chair Jerome Powell seems steadfast right now in his belief that any gain in inflation is likely temporary, we’re not so sure. A number of dynamic factors, such as money-supply growth, higher wages and increased fiscal stimulus, against a backdrop of pent-up demand for consumer services, could lead to inflation levels that require a Fed response.”

“Analysis of fed funds futures and overnight index swap markets suggest that investors now expect the first Fed rate hike could come in February 2023, well ahead of the Fed’s current guidance of December 2023.”

“Survey-based indicators from primary dealers and investors suggest that market participants believe that a tapering of the Fed’s bond-buying program will begin in the first quarter of 2022. For that timeline, the Fed would have to start signaling a shift later this year to avoid major market upset.”