Morgan Stanley said in a note on Monday that the rise in the S&P 500 in 2022 looks challenging as the outlook for U.S. manufacturing activity appears to be weak.
Morgan Stanley analysts say manufacturing orders could determine the stock's movements. They noted a strong correlation between new order activity in the monthly manufacturing survey and year-over-year changes in the broader market index, especially over the past 20 years.
The Institute for Supply Management (ISM)'s January Purchasing Managers' Index (PMI) will be released on Tuesday, and economists surveyed by Econoday expect the index to fall to 57.5 from 58.7 in December.
In addition, IHS Markit will release final data on U.S. manufacturing activity in January on Tuesday. Preliminary data previously released showed the index hit 55, a 15-month low, and supply chain delays and staff shortages hurt the economy as the Omilon variant virus spread.
Earlier this month, the New York Fed's Empire State Manufacturing Survey said business activity "suddenly leveled off" in early January, down 33 points to -7. The new orders index fell 32 points to -5 points, but companies are generally optimistic about the 6-month outlook.
Morgan Stanley Wealth Management said in its weekly report updated by the Global Investment Committee that the close correlation between the S&P 500 and manufacturing data is most often seen on monthly PMIs, but the Imperial State Manufacturing Survey, which is usually released two weeks in advance, also shows a close relationship with the stock market.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote: "As both indices still point to the downside, the annual rise in the S&P 500 can be challenging. ”
She said the market is considering how the Fed's hardline monetary policy will work.
"One possibility is that the Fed is tightening policy too late, which will slow growth and inflation, just as cyclical forces are correcting extremes, thereby increasing the risk of recession," she wrote. Another possibility is that the Fed is overly cautious, which would raise inflation expectations while consumption is weighed down by high prices, thus facing the risk of stagflation. ”
"In either case, investors need to consider whether inventories are plentiful and supply chains are safe; whether high inflation is destroying demand; whether the desired shift to services spending will be undermined or delayed; and how fiscal cliffs and tight monetary policy will affect the economy."
This article originated from the financial world