InvestIdeas

As a run of positive catalysts comes to an end -- including improved clarity from earnings season, a new European Union recovery fund and the possibility of further U.S. fiscal stimulus -- the favorable environment for risk assets is expected to change, Morgan Stanley strategists led by Andrew Sheets wrote in a note Friday.

The team suggested investors reduce exposure for the August-September “danger zone” when seasonality worsens for equities and credit, the U.S. presidential election comes into focus and an “exceptional” period of positive economic surprises likely moderates.

They recommended investors consider raising cash balances and buying credit-default-swap index protection in the bond market. They also suggested looking at European assets which are more likely to outperform.

A 2%-3% decline sometime in the next couple of weeks wouldn’t be at all surprising to me.

When those smallish pullbacks come along, though, he advises against panic (he urged no panic in early March too), saying “they will be and should be used as buying opportunities.”

That is because there is nowhere else for investors to put their money as any Federal Reserve interest rate increase is years out.

1. Technical. One potential correction trigger is technical, as he says 2020 has been closely tracking the action in 2009.

2. Earnings. A “substantial pullback in earnings could also trigger a pullback,” he said, noting that second-quarter S&P 500 earnings per share came in far better than expected.

3. Covid19. Frederick is watching the coronavirus pandemic as a potential trigger, with schools opening across the country and the potential for a dramatic uptick in the case count spooking markets.

4. China Trade War. Trade issues with China shouldn’t be dismissed.

5. Unemployment Stimulus. Another stick of dynamite for stocks is continued wrangling over enhanced unemployment benefits in the U.S.

1. Increasingly narrow breadth
2. Growing fear
3. Historically negative real yields
4. Overstretched and overbought
5. September