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Driving stock market volatility: Morgan Stanley warns of fluctuations mid rate cut hopes

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Morgan Stanley equity strategists have warned their clients about potential volatility in the stock markets this month due to fluctuating rates.

Pointing out the current active narrative of expectations that the Federal Reserve can implement rate cuts next year as inflation falls, saying:

  • 130bps of cuts are now priced into Fed Funds futures through the end of 2024
  • this is a dovish expectation in the context of stable economic growth in 2024
  • large caps historically outperform small caps before and after the initial rate cut

MS compare the market pricing in Fed pivots several times over the past year to the current pricing, saying investor are more supportive of rate cut expectations now than in the past:

  • advise waiting for a more opportune entry point later in December to capture a seasonal rally in small caps instead of chasing the recent outsized move
  • “December may see some near term volatility in both rates and equities before more constructive seasonal trends for equities and market expectations of a potential ‘January Effect’ have an impact.”

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