A full-blown economic crisis and double-digit stock losses: Morgan Stanley just unveiled its revised bear case for the trade war– and it’s not quite

The US’ ongoing trade war with China has experienced wild twists and turns, triggering shifts in market sentiment at a moment’s notification. That’s made it tough to muffle the sound in order to get to the numbers that matter most.

Morgan Stanley’s newest work has actually cut through the market’s ambiguous shade, determining the economic, equity-market, and earnings-growth ramifications of President Donald Trump’s trade war.

And the firm isn’t exactly sugar-coating its newest round of forecasts. It’s weighed current developments in the trade war and got here at a stark bear case that should have investors everywhere worried.

Here’s a summary at Morgan Stanley’s bear-case forecasts:

  • S&P 500 falls 16%to 2,400 over the next 6-12 months
  • Revenues growth bottoms out in 2021 at -14%
  • A full-blown economic recession hits in 2020

In broad strokes, Morgan Stanley argues that if the world’s two biggest economies can’t come to a practical arrangement, then the US faces a real chance of an economic downturn in the near future.

And although all areas of the marketplace are prone to a financial slump, some areas are far more exposed than others. The chart below– which reflects points out of the word “tariff” on business incomes calls– serves as a convenient guide for which sectors are bracing most for the resulting earnings discomfort.

MS chart

Industrials, details innovation, and consumer discretionary companies account for over half of the “tariff” points out above, and for excellent factor– they are all incredibly susceptible to boosts in input costs, and supply-chain interruptions.

“An already slowing economy and clear unfavorable operating leverage indicate that it is more difficult to pass along expenses than business expect without initiating demand destruction, and that margin effectiveness are already in short supply,” the Morgan Stanley strategists passed on.

This is an issue not just for financiers overly exposed to these sectors, but likewise for the marketplace as a whole. Selloffs tend to be fast-moving and nondiscriminatory, so it’s sensible to think that trouble brewing in a couple of portions of the market might infect others through contagion.

Couple this concept with business debt levels nearing record highs, weak point in the labor market, and geopolitical unpredictability, and you have a recipe for a speedy drawdown efficient in upending the 10- year bull market.

It is very important to bear in mind that the projections above are just applicable if no offer is reached, 25%tariffs are slapped on all staying Chinese imports, and China retaliates with countermeasures of its own– something investors are frantically trying to prevent.

Since today, Morgan Stanley is setting aside a 20%probability of the bear-case concerning fulfillment, so the possibility of a complete blown economic crisis isn’t always likely. Still, the firm is stressing care.

“We would advise a mindful method to business with material cost exposure to Chinese imports that downplay the prospective impacts,” said the strategists.


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