The Tell: Why the rise in COVID-19 cases is keeping Morgan Stanley bullish on risky assets


For Morgan Stanley, an uptick in COVID-19 cases isn’t a risk to the double-digit returns in U.S. stocks thus far, but could be a catalyst for further gains.

Matthew Hornbach, a strategist for the U.S. bank, argued that the growth of COVID-19 cases across the U.S. could keep the Federal Reserve and other central banks from pulling the plug on their accommodative monetary policies, seen as key contributors to the rally in equities and corporate bonds since the start of the pandemic.

The prospect of a delayed timetable for tapering and rate increases could buoy risky assets in the U.S. and other developed markets.

“Why should investors pay attention when the severe, global lockdown experienced in 2020 is unlikely to occur again? Because central bankers are paying attention, and it may affect their confidence in beginning to withdraw policy support,” said Hornbach, in a note penned Friday.

See: Powell suggests Fed will follow the 2013–14 playbook when it starts to taper its asset purchases

The most recent survey of market participants by the New York Fed suggested investors expect the central bank to start tapering its asset purchases in the first quarter of 2022. Since last summer, the Fed has been buying $80 billion in Treasurys and $40 billion in mortgage-backed securities each month.

But if the Fed frets over the pandemic’s worsening trajectory, Hornbach says a more realistic date would be the second quarter of next year, while also pushing out the timeline for the first rate increase since the pandemic.

Fed Chairman Jerome Powell said last week that tapering of its asset purchases would come “well before” any interest-rate increase.

The acceleration of COVID-19 cases is drawing attention from anxious investors worried that record-high U.S. equities may be vulnerable to a short-term correction.

The U.S. has averaged 67,308 cases a day in the past week, up 5% from the average two weeks ago. This is despite half of all adults in the U.S. now receiving at least one COVID-19 vaccine dose, according to the Centers for Disease Control and Prevention.

The S&P 500

and Dow Jones Industrial Average

were heading for modest losses on Monday, but closed at all-time highs on Friday after booking weekly gains of over 1%.

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