Morgan Stanley says markets should brace for 'fire and ice' as massive paradigm shift begins
Odds of a recession are higher if inflation is cemented into economy, Morgan Stanley economist says
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Investors should brace for continued upheaval in the global markets, according to Morgan Stanley's co-president, as the era of low interest rates and cheap debt grinds to a halt.
Ted Pick, the head of institutional securities at the investment bank, warned the stock market could experience continued bouts of volatility as the economy is dominated by twin threats: fears over red-hot inflation and a looming recession, which he respectively dubbed "fire" and "ice."
"We'll have these periods where it feels awfully fiery, and other periods where it feels icy, and clients need to navigate around that," Pick said during the Bernstein Strategic Decisions Conference. "We'll be having this conversation for the next 12, 18, 24 months."
INFLATION SOARS 8.3% IN APRIL, HOVERING NEAR 40-YEAR HIGH
There are growing fears on Wall Street that the Fed may inadvertently trigger a recession with its war on inflation, which climbed by 8.3% in April, near a 40-year high. Other firms forecasting a downturn in the next two years include Bank of America, Fannie Mae and Deutsche Bank.
A man shops at a Safeway grocery store in Annapolis, Maryland, on May 16, 2022, as Americans brace for summer sticker shock as inflation continues to grow. ((Photo by JIM WATSON/AFP via Getty Images) / Getty Images)
Pick said there is a chance the U.S. slides into a recession, but suggested it won't be certain whether there's a downturn until next fall. If "inflation and inflationary expectations are cementing" into the economy by the fall, Pick said the odds of a downturn and slowdown in banking business are much higher, as it would force the Federal Reserve to raise interest rates even higher.
Economic growth in the U.S. is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.
Fed policymakers already raised the benchmark interest rate by 50 basis points last month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation. Chairman Jerome Powell recently pledged that officials will "keep pushing" until inflation falls closer to the Fed's 2% target.
In this Dec. 1, 2020 file photo, Federal Reserve Chair Jerome Powell listens during a Senate Banking Committee hearing on Capitol Hill in Washington. (Al Drago/The New York Times via AP, Pool / AP Newsroom)
Still, he has acknowledged there could be some "pain associated" with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Powell has, however, warned that a soft landing is not assured.
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"It's going to be a challenging task, and it's been made more challenging in the last couple of months because of global events," Powell said last month during a Wall Street Journal live event, referring to the Ukraine war and COVID lockdowns in China.
But he added that "there are a number of plausible paths to having a soft or soft-ish landing. Our job isn't to handicap the odds, it's to try to achieve that."