Morgan Stanley CIO Mike Wilson: The Early-Cycle Rolling Recovery Has Begun

Economic Re-acceleration and Recession Risk

• 💡 The economy is already re-accelerating, and the risk of recession is considered to be behind us.
• 🧠 Forecasting stock markets and the economy is as difficult as predicting gigawatts, requiring looking six months into the future.
• 📈 For the past three years, the thesis has been a rolling recession, with the trough of the labor cycle identified in March-April based on job revisions.

Market Confirmation and Fed's Role

• ✅ The market has confirmed this thesis, bottoming at the same time the analysis indicated the labor cycle trough.
• 📉 Typically, markets bottom during a recession, not after it's over and obvious.
• ⚠️ The Fed is working with lagging data, similar to 2008 and 2001, but is more behind the curve this cycle due to labor data.

Interest Rates and Market Rotation

• 💰 The Fed needs to cut rates to facilitate a full recovery, as current high rates are hindering businesses and consumers.
• ⚡ A sell-the-news event occurred because the Fed's 25 basis point cut was less aggressive than the market expected or priced in.
• 🧩 There's a window of about six weeks where the market is at risk due to the tension between the Fed being behind the curve and market expectations for more aggressive action.

New Bull Market and Early Cycle Thesis

• 🚀 The call is that April marked the end of a bear market, with the average stock down 35% from July/April of the previous year to April of the current year.
• 🐂 A new bull market began in April and is evolving, with small caps and low-quality early cycle stocks outperforming in absolute terms.
• ⚠️ The risk is that the Fed stays behind the curve longer than anticipated, potentially leading to a meaningful correction in the next six weeks, though this doesn't change the overall thesis of an early-cycle rolling recovery.