Are investors seeing a micro or macro driven market?

Global markets seek stability from geopolitical tensions, particularly the conflicts in the Middle East, as Americans parse through the Federal Reserve's back-and-forth sentiment on interest rate cuts. With all these sorts of headwinds, investors try to figure out whether micro or macroeconomic factors are driving the current market (^DJI, ^IXIC, ^GSPC).

Morgan Stanley Global Head of Corporate Credit Research Andrew Sheets discusses the economic headlines driving markets, including the Fed's monetary policy.

"All the focus is often on these big macro variables — when is the Fed going to make its first rate cut? Where are interest rates going, where is inflation headed? Some of these geopolitical concerns," Sheets explains. "But if that were the real driver, I think if it were these big picture issues that were driving the market, I think what you'd expect is a lot of different assets, a lot of different stocks, a lot of credits all moving together, all moving kind of to the same side of the ship at the same time. and that's simply not what we see."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video Transcript

Let's talk about some of the broader moves that we're seeing within the market and the bond market here because between sticky inflation, future potential rate cuts here and wars playing out in the Middle East and Ukraine, it's reasonable to argue that we are currently in a macro driven environment here for the market, but with assets now moving with unusual independence, at least according to our next, he's arguing that if you look just under the hood, we might actually be in a micro market here for more on this.We wanna bring in Andrew Sheets, Morgan Stanley, global head of corporate credit research.It's great to have you here.So talk to us just about when everyone is saying this is a macro driven market.You're saying it actually might be a micro driven market.Why?Yeah, thanks.It's, it's great to be here.So I look, I think it's very understandable.I think if, if we, we read the news, if we, we talk to other investors, all the focus is is often on these big macro variables.You know, when is the fed gonna make its first great cut, you know, where are interest rates going, where's inflation uh headed, uh you know, some of these geopolitical concerns and, and, but if that were the real driver, I think if it were these big picture issues that were driving the market, I think what you'd expect is a lot of different assets, a lot of different stocks, a lot of credit all moving together, all moving kind of to the same side of the ship at the same time.And that's simply not what we see.I think this year so far has been unique in how independently individual stocks, individual credits are moving from each other.And, and I think that's important.I think that's a real sign that a higher for longer rate environment can mean that overall things are fine but, but individually you have winners and losers and it creates a really good environment for stock picking for kind of active management because individual stocks, individual credits are moving separately from each other even as the overall picture is somewhat more stable.So I think that's an important distinction that we think really matters to markets.I mean, Andrew, it just seems like for so much of the, we've been trying to figure out will they won't they?With the fed?That's a macro, you have to weigh in all of these exogenous threats.Also.Macro, I mean, where are the the biggest micro indicators that are having more outsized impact than those macro events that we've had to discuss?And continue to keep tabs on.Yeah, I think that's a great point.So I, I guess, I think about this in, in a couple of ways, you know, one is right, we went from the market at the start of the year pricing in almost seven rate cuts from the fed to the market today pricing in, you know, less than two rate cuts.And over that time, the market has been generally strong and, and credit markets have been strong, spreads are tighter.So I I think the market has clearly shown that despite, you know, very different expectations of fed policy, it it can continue to operate, you can, it can continue to be ok. And I think we see this in a more, you know, kind of narrower level or more recent level where, you know, again after that, that GDP number, I think it was two weeks ago where it looked like the headline GDP number was weak.We we thought it was a little bit better, but the initial read of that was, it was weak GDP.It was high inflation, you know what helped turn the market around?It was a very micro development around earnings.So earnings season has generally been pretty good in, in Europe, in the US.So I I think you see that in the ability of earnings to offset some of the scarier macro headlines.And I think you see this just generally with year to date performance with you know, despite some big wings in fed expectations, I think the market is telling you that it can, it can handle that as long as other conditions are met.So Andrew is the market almost priced to perfection at this point.And then what does that ultimately mean here for investors, identifying those best opportunities?Yeah.So I think this is a question that really varies depending on what market you're looking at.Um for, for European equities.For example, we we do not think that's a market that's that's priced for perfection.We still have reasonable upside to my colleague's targets.Um We think the loan market in in the US kind of closer to uh to my area of credit uh where where yields are still above 9% for us loan.Uh We do not think that that price for perfection uh in the context of a soft landing.So it certainly, I think varies depending on where in the market uh you know, you look at, but overall we, we think that there are still opportunities uh around that that are, that are not yet kind of fully baking in the soft landing scenario.Andrew always a pleasure to get some of your insights.Andrew Sheets.Morgan Stanley Global Head of corporate credit research.Thanks so much for taking the time.