Morgan Stanley’s chief investment strategist, Mike Wilson, acknowledges that US stocks in 2023 are faring better than expected due to “excessive” fiscal policy measures and explosive money-supply growth. Wilson attributes his misjudgment to the unexpectedly strong impact of government spending on the US economy and markets. Fiscal measures have played a crucial role in buoying these sectors.
In his analysis, Wilson highlights the stark contrast between fiscal spending and the declining US unemployment rate, which reached a remarkable low of 3.5% in July, according to data from the Department of Labor. This juxtaposition demonstrates the scale of governmental intervention and support.
Although Wilson accurately predicted the inflation-driven selloff last year, he anticipated a significant stock market decline during the first half of 2023. However, despite this bearish outlook, stock prices were bolstered by the surge in demand for artificial intelligence technology and the resilience of the US economy. This disconnect prompted Wilson to reevaluate his position but also consider the possibility of further market growth.
For more on this subject, read Morgan Stanley’s Mike Wilson’s insightful analysis: “We Were Wrong About the 2023 Stock-Market Rally, but Stay Hopeful.”
The U.S. Stock Market Rally: Assessing the Potential
Introduction
Excessive Government Spending
It is highly probable that the government’s excessive spending will continue, at least until the next debt ceiling discussion in 2025. Fitch Ratings recently highlighted the growing budget deficits as a reason for downgrading the U.S.’s AAA credit rating. This fiscal policy has allowed the economy to surpass growth forecasts, which in turn has reduced the likelihood of a recession.
The Aftermath of Excessive Spending
While excessive spending during good economic times can have short-term benefits, it can also have long-term consequences. The major concern is that this limits Congress’s ability to act effectively during future recessions. This lack of fiscal flexibility could lead to challenges for corporate earnings and subsequently impact the stock market.
Stock Market Performance
Despite recent setbacks, U.S. stocks showed signs of recovery on Monday. The S&P 500 ended a four-day losing streak and was up 0.5% near 4,500, while the Nasdaq Composite experienced a slight dip of 0.2% at 13,881. The Dow Jones Industrial Average also witnessed an increase of 300 points, or 0.9%, reaching 35,362.
Conclusion
As the U.S. stock-market rally continues, it is important to assess the potential risks involved. While fiscal policy has contributed to economic growth, it may limit future responses during downturns. It will be crucial for investors and traders alike to monitor these factors closely as they navigate the ever-changing stock market landscape.
