There has been a clear shift in market mood and sentiment ever since the covid pandemic: whereas previously Fed intervention was always spoken of glowingly, especially by members of the establishment and career finance professionals, this has changed and for the best example of that look no further than Lisa Shalett, Morgan Stanley’s chief investment officer for the company's massive wealth unit, who said that the Fed's policy of keeping its “foot on the accelerator” to boost the economy has left the market showing signs of "fragility."
That said, she was quick to ease concerns about fallout from the implosion of Archegos, saying it doesn’t "threaten" the financial system, although it would be easy for Morgan Stanley to say that - after all, together with Goldman - the bank decided to break ranks with other Prime Brokers and dumped its exposure to the liquidating fund.
"This, unlike some other issues, is not of an order of magnitude where there’s systemic risk," Shalett says, although for some banks - such as Credit Suisse and Nomura - which lost billions, it certainly does have the taste of systemic risk.
Archegos aside, Shalett admitted that Fed policymakers are making a massive bet, that the liquidity being pumped into the financial system is more important for the economy than the “financial accidents or bubbles” that have popped up as a result.
“It’s time for investors to retool portfolios,” she says, arguing that the shift should be in favor of active management and shorter duration. Economic growth will be “much stronger” than it’s been, and that’s good for cyclicals and good for the labor market, but creates headwinds for the bond market and for stock multiples.
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