Thoughts on the Market

With a second Trump term at least partially reflected in the price of global markets, we focus on two key debates for the longer-term: Potential tariffs and fiscal policy. 

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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast – some initial thoughts on the market implications of a second term for President Trump.

It’s Wednesday, Nov 6, at 2pm in New York.

As it became clearer on election night that Former President Trump was set to win a second term in the White House, markets began to price in the expected impacts of resulting public policy choices. The US dollar rallied, which makes sense when you consider that President Trump has argued for higher tariffs, something that could hurt rest of world growth more than the US.  

US Treasuries sold off and yield rose, something that makes sense given President Trump supports tax policy choices that could meaningfully expand deficits. And US equity markets rallied led by key sectors that could benefit fundamentally from extended tax breaks and deregulation, including industrials and energy. 

But with a second Trump term now at least partially reflected in the price of markets across assets, it gets harder from here to understand how markets move.  There’s several key debates we’ll be tracking, here’s two that are top of mind. 

First, how will tariffs be implemented? Per the work of our economists, higher tariffs can raise inflation and crimp growth. They estimated that a blanket 10 per cent tariffs and 60 per cent tariffs on China imports would raise inflation by 1 per cent and dampen GDP growth by 1.4 per cent. Some pretty big numbers that would really challenge the soft-landing narrative and positive backdrop for equities and other riskier assets. Other approaches may carry the same risks, but to a lesser degree. Tariffs exercised via executive authority would, in our view, likely have to be targeted to countries and products – as opposed to implemented on a blanket basis. So, the approach to tariffs could represent a substantial difference in the outlook for markets. 

Second, how quickly and to what degree might US deficits expand? Our presumption has been that fiscal policy action, regardless of US election outcome, wouldn’t become clear until late 2025, largely governed by the need to address several provisions from the Tax Cuts and Jobs Act that expire at the end of that year. But, while not our base case it's of course possible that a Republican Congressional majority could deliver on tax cuts earlier – and perhaps even in larger size. The resolution to this debate could make the difference between yields climbing even higher than they have recently and taking a pause at these levels. 

Bottom line, as the election ends and the Presidential transition begins, there’s a lot about policy implementation that we can learn to guide our market strategy. We’ll be paying attention to all the key policymaker statements and deliberations, and feed through the signal to you.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Analyst Nathan Feather discusses why the online dating market is slowing down, and whether or not it can get back on track.

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Welcome to Thoughts on the Market. I’m Nathan Feather, Morgan Stanley’s Online Dating and US Small- and Mid-Cap eCommerce Analyst. 

Today, people across America are casting their votes. On this podcast, however, we're taking a break from our election coverage. And taking a leap into a different matter on many minds … and hearts. Online dating. Why it fell out of favor and how it might make a comeback.

It’s November 5, at 10am in New York. 

Finding love is a tricky business. Dating has never been easy; but with an epidemic of loneliness and isolation, singles today are finding it harder than ever. 

For those looking for love, online dating seems to offer endless possibilities. Since its inception just three decades ago, the stigma around online dating has faded, leading more and more daters to put their faith – and money – into the algorithm. In the US, three out of four actively dating singles have used it at some point in their journey. 

But after years of consistent double-digit growth, the online dating market is now faltering, with US industry revenue growing just 1 per cent this year.  

Why? Well, we think the issue lies primarily in weakening user trends with the US user bases of major dating apps in decline. Since last spring, we have seen around a 15 per cent decrease in dating app use by singles actively looking for a relationship. To us this indicates that the product is not matching user expectations as some daters have grown tired of the persistent swiping and dead ends. Consequently, daters' intentions to use online dating in the future have consistently declined. 

Now, there are many theories about why this is happening. We think there may be residual impact from the pandemic when singles used online dating at record rates. People who found relationships during that time likely left the apps. And those who didn't find a partner also often left the apps, disappointed and less likely to return. But that’s not all; while Millennials embraced the fun and casual experience of swipe apps, Gen Z isn’t so enamored – instead searching for greater authenticity. 

So, can online dating be fixed or are these issues beyond repair? Well, there are two main schools of thought. The first believes that the issue with online dating is a lack of innovation, and an improved product should lead to improved financials. The second camp argues that daters are fundamentally shifting away from these products to date in person or not at all. 

We sit firmly in the first camp and think this is a product issue. The apps need to do a better job helping people find lasting relationships. Granted, fixing this is far easier said than done. Human relationships are messy and complicated. But we do think there are clear opportunities. Many of the large apps have stayed relatively unchanged over the past five to 10 years and are meeting the demands of users from then – and not now. With improvements to the user experience and better tailoring to the goals of today’s daters, we believe the apps can reaccelerate user growth. In fact, brands that have consistently improved the user experience have recently fared far better. 

With that being said, we do think it will take time to find the product improvements that really work and convince daters to give the apps another shot. But as products evolve, we think daters and investors can rekindle their relationship with online dating.

If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market today, with a friend, colleague, significant other -- even a situationship. Thanks for listening.

On the eve of a competitive US election, our CIO and Chief US Equity Strategist joins our head of Corporate Credit Research and Chief Fixed Income Strategist to asses how investors are preparing for each possible outcome of the race.

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Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist.

Andrew Sheets: I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley.

Vishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.

Mike Wilson: Today on the show, the day before the US election, we're going to do a conversation with my colleagues about what we're watching out for in the markets.

It's Monday, November 4th, at 1130am in New York.

So let's get after it.

Andrew Sheets: Well, Mike, like you said, it's the day before the US election. The campaign is going down to the wire and the polling looks very close. Which means both it could be a while before we know the results and a lot of different potential outcomes are still in play. So it would be great to just start with a high-level overview of how you're thinking about the different outcomes.

So, first Mike, to you, as you think across some of the broad different scenarios that we could see post election, what do you think are some of the most important takeaways for how markets might react?

Mike Wilson: Yeah, thanks, Andrew. I mean, it's hard to, you know, consider oneself as an expert in these types of events, which are extremely hard to predict. And there's a lot of permutations, by the way. There's obviously the presidential election, but then of course there's congressional elections. And it's the combination of all those that then feed into policy, which could be immediate or longer lasting.

So, the other thing to just keep in mind is that, you know, markets tend to pre-trade events like this. I mean, this is a known date, right? A known kind of event. It's not a surprise. And the outcome is a surprise. So people are making investments based on how they think the outcome is going to come. So that's the way we think about it now.

Clearly, you know, treasury markets have sold off. Some of that's better economic data, as our strategists in fixed income have told us. But I think it's also this view that, you know, Trump presidency, particularly Republican sweep, may lead to more spending or bigger budget deficits. And so, term premium has widened out a bit, so that’s been an area; here I think you could get some reversion if Harris were to win.

And that has impact on the equity markets -- whether that's some maybe small cap stocks or financials; some of the, you know, names that are levered to industrial spending that they want to do from a traditional energy standpoint.

And then, of course, on the negative side, you know, a lot of consumer-oriented stocks have suffered because of fears about tariffs increasing along with renewables. Because of the view that, you know, the IRA would be pared back or even repealed.

And I think there's still follow through particularly in financials. So, if Trump were to win, with a Republican Congress, I think, you know, financials could see some follow through. I think you could see some more strength in small caps because of perhaps animal spirits increasing a little further; a bit of a blow off move, perhaps, in the indices.

And then, of course, if Harris wins, I would expect, perhaps, bonds to rally. I think you might see some of these, you know, micro trades like in financials give back some along with small caps. And then you'd see a big rally in the renewables. And some of the tariff losers that have suffered recently. So, there's a lot, there's a lot of opportunity, depending on the outcome tomorrow.

Andrew Sheets: And Vishy, as you think about these outcomes for fixed income, what really stands out to you?

Vishy Tirupattur: I think what is important, Andrew, is really to think about what's happening today in the macro context, related to what was happening in 2016. So, if you look at 2016; and people are too quick to turn to the 2016 playbook and look at, you know, what a potential Trump, win would mean to the rates markets.

I think we should keep in mind that going into the polls in 2016, the market was expecting a 30 basis points of rate hikes over the next 12 months. And that rate hike expectation transitioned into something like a 125 place basis points over the following 12 months. And where we are today is very different.

We are looking at a[n] expectation of a 130-135 basis points of rate cuts over the next 12 months. So what that means to me is underlying macroeconomic conditions in where the economy is, where monetary policy is very, very different. So, we should not expect the same reaction in the markets, whether it's a micro or macro -- similar to what happened in 2016.

So that's the first point. The second thing I want to; I'm really focused on is – if it is a Harris win, it's more of a policy continuity. And if it's a Trump win, there is going to be significant policy changes. But in thinking about those policy changes, you know, before we leap into deficit expansion, et cetera, we need to think in terms of the sequencing of the policy and what is really doable.

You know, we're thinking three buckets. I think in terms of changes to immigration policy, changes to tariff policy, and changes to tax code. Of these things, the thing that requires no congressional approval is the changes to tariff policy, and the tariffs are probably are going to be much more front loaded compared to immigration. Or certainly the tax policy [is] going to take a quite a bit of time for it to work out – even under the Republican sweep scenario.

So, the sequencing of even the tariff policy, the effect of the tariffs really depends upon the sequencing of tariffs itself. Do we get to the 60 per cent China tariffs off the bat? Or will that be built over time? Are we looking at across the board, 10 per cent tariffs? Or are we looking at it in much more sequential terms? So, I would be careful not to jump into any knee-jerk reaction to any outcome.

Andrew Sheets: So, Mike, the next question I wanted to ask you is – you've been obviously having a lot of conversations with investors around this topic. And so, is there a piece of kind of conventional wisdom around the election or how markets will react to the election that you find yourself disagreeing with the most?

Mike Wilson: Well, I don't think there's any standard reaction function because, as Vishy said -- depending on when the election's occurring, it's a very different setup. And I will go back to what he was saying on 2016. I remember in 2016, thinking after Trump won, which was a surprise to the markets, that was a reflationary trade that we were very bullish on because there was so much slack in the economy.

We had borrowing capabilities and we hadn't done any tax cuts yet. So, there was just; there was a lot of running room to kind of push that envelope.

If we start pushing the envelope further on spending or reflationary type policies, all of a sudden the Fed probably can't cut. And that changes the dynamics in the bond market. It changes the dynamics in the stock market from a valuation standpoint, for sure. We've really priced in this like, kind of glide path now on, on Fed policy, which will be kind of turned upside down if we try to reflate things.

Andrew Sheets: So Vishy, that's a great point because, you know, I imagine something that investors do ask a lot about towards the bond market is, you know, we see these yields rising. Are they rising for kind of good reasons because the economy is better? Are they rising for less good reasons, maybe because inflation's higher or the deficit's widening too much? How do you think about that issue of the rise in bond yields? At what point is it rising for kind of less healthy reasons?

Vishy Tirupattur: So Andrew, if you look back to the last 30 days or so, the reaction the Treasury yields is mostly on account of stronger data. Not to say that the expectation changes about the presidential election outcomes haven't played a role. They have. But we've had really strong data. You know, we can ignore the data from last Friday – because the employment data that we got last Friday was affected by hurricanes and strikes, etc. But take that out of the picture. The data has been very strong. So, it's really a reflection of both of them. But we think stronger data have played a bigger role in yield rise than electoral outcome expectation changes.

Andrew Sheets: Mike, maybe to take that question and throw it back to you, as you think about this issue of the rise in yields – and at what point they're a problem for the equity market. How are you thinking about that?

Mike Wilson: Well, I think there's two ways to think about it. Number one, if it really is about the data getting better, then all of a sudden, you know, maybe the multiple expansion we've seen is right. And that, it's sort of foretelling of an earnings growth picture next year that's, you know, much faster than what, the consensus is modeling.

However, I'd push back on that because the consensus already is modeling a pretty good growth trajectory of about 12 per cent earnings growth. And that's, you know, quite healthy. I think, you know, it's probably more mixed. I mean, the term premium has gone up by 50 basis points, so some of this is about fiscal sustainability – no matter who wins, by the way. I wouldn't say either party has done a very good stewardship of, you know, monitoring the fiscal deficits; and I think some of it is definitely part of that. And then, look, I mean, this is what happened last year where, you know, we get financial conditions loosened up so much that inflation comes back. And then the Fed can't cut.

So to me, you know, we're right there and we've written about this extensively. We're right around the 200-day moving average for 10-year yields. The term premium now is up about 50 basis points. There's not a lot of wiggle room now. Stock market did trade poorly last week as we went through those levels. So, I think if rates go up another 10 or 20 basis points post the election, no matter who wins and it's driven at least half by term premium, I think the equity market's not gonna like that.

If rates kind of stay right around in here and we see term premium stabilize, or even come down because people get more excited about growth -- well then, we can probably rally a bit. So it's much a reason of why rates are going up as much as how much they're going up for the impact on equity multiples.

Vishy Tirupattur: Andrew, how are you thinking about credit markets against this background?

Andrew Sheets: Yeah, so I think a few things are important for credit. So first is I do think credit is a[n] asset class that likes moderation. And so, I think outcomes that are likely to deliver much larger changes in economic, domestic, foreign policy are worse for credit. I mean, I think that the current status quo is quite helpful to credit given we're trading at some of the tightest spreads in the last 20 years. So, I think the less that changes around that for the macro backdrop for credit, the better.

I think secondly, you know, if I -- and Mike correct me, if you think I'm phrasing this wrong. But I think kind of some of the upside case that people make, that investors make for equities in the Republican sweep scenario is some version of kind of an animal spirits case; that you'll see lower taxes, less regulation, more corporate risk taking higher corporate confidence. That might be good for the equity market, but usually greater animal spirits are not good for the credit market. That higher level of risk taking is often not as good for the lenders. So, there are scenarios that you could get outcomes that might be, you know, positive for equities that would not be positive for credit.

And then I think conversely, in say the event of a democratic sweep or in the scenarios where Harris wins, I do think the market would probably see those as potentially, you know, the lower vol events – as they're probably most similar to the status quo. And again, I think that vol suppression that might be helpful to credit; that might be helpful for things like mortgages that credit is compared to. And so, I think that's also kind of important for how we're thinking about it.

To both Mike and Vishy, to round out the episode, as we mentioned, the race is close. We might not know the outcome immediately. As you're going to be looking at the news and the markets over Tuesday evening, into Wednesday morning. What's your process? How closely do you follow the events? What are you going to be focused on and what are kind of the pitfalls that you're trying to avoid?

Maybe Vishy, I'll start with you.

Vishy Tirupattur: I think the first thing I'd like to avoid is – do not make any market conclusions based on the first initial set of data. This is going to be a somewhat drawn out; maybe not as drawn out as last time around in 2020. But it is probably unlikely, but we will know the outcome on Tuesday night as we did in 2016.

So, hurry up and wait as my colleague, Michael Zezas puts it.

Mike Wilson: And I'm going to take the view, which I think most clients have taken over the last, you know, really several months, which is -- price is your best analyst, sadly. And I think a lot of people are going to do the same thing, right? So, we're all going to watch price to see kind of, ‘Okay, well, how was the market adjusting to the results that we know and to the results that we don't know?’

Because that's how you trade it, right? I mean, if you get big price swings in certain things that look like they're out of bounds because of positioning, you gotta take advantage of that. And vice versa. If you think that the price movement is kind of correct with it, there's probably maybe more momentum if in fact, the market's getting it right.

So this is what makes this so tricky – is that, you know, markets move not just based on the outcome of events or earnings or whatever it might be; but how positioning is. And so, the first two or three days – you know, it's a clearing event. You know, volatility is probably going to come down as we learn the results, no matter who wins. And then you're going to have to figure out, okay, where are things priced correctly? And where are things priced incorrectly? And then I can look at my analysis as to what I actually want to own, as opposed to trade

Andrew Sheets: That's great. And if I could just maybe add one, one thing for my side, you know, Mike – which you mentioned about volatility coming down. I do think that makes a lot of sense. That's something, you know, we're going to be watching on the credit side. If that does not happen, kind of as expected, that would be notable. And I also think what you mentioned about that interplay between, you know, higher yields and higher equities on some sort of initial move – especially if it was, a Republican sweep scenario where I think kind of the consensus view is that might be a 'stocks up yields up' type of type of environment. I think that will be very interesting to watch in terms of do we start to see a different interaction between stocks and yields as we break through some key levels. And I think for the credit market that interaction could certainly matter.

It's great to catch up. Hopefully we'll know a lot more about how this all turned out pretty soon.

Vishy Tirupattur: It's great chatting with both of you, Mike and Andrew.

Mike Wilson: Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our US Fintech and Payments analyst reviews a recent survey that reveals key trends on how Gen Z and Millennials handle their personal finances.

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Welcome to Thoughts on the Market. I’m James Faucette, Morgan Stanley’s Head of US Fintech and Payments. Today I’ll dig into the way young people in the US approach their finances and why it matters.

It’s Friday, November 1st, at 10am in New York. 

You’d think that Millennials – also commonly known as Gen Y – and Gen Z would come up with new ways to think about money. After all, they live most of their lives online, and don’t always rely on their parents for advice – financial or otherwise. But a survey we conducted suggests the opposite may be true. 

To understand how 16 to 43 year-olds – who make up nearly 40 per cent of the US population – view money, we ran an AlphaWise survey of more than 4,000 US consumers. 

In general, our work suggests that both Millennials and Gen Z’s financial goals, banking preferences, and medium-term aspirations are not much different from the priorities of previous generations. Young consumers still believe family is the most important aspect in life, similar to what we found in our 2018 survey. They have a positive outlook on home ownership, college education, employment, and their personal financial situation. 28-to-43-year-olds have the second highest average annual income among all age cohorts, earning more than $100,000. They spend an average of $86,000 per year, of which more than a third goes toward housing. 

Gen Y and Z largely expect to live in owned homes at a greater rate in five to 10 years, and younger Gen Y cohorts' highest priority is starting a family and raising children in the medium term. This should be a tailwind for many consumer-facing real estate property sectors including retail, residential, lodging and self-storage. However, Gen Y and Z are less mobile today than they were pre-pandemic. Compared to their peers in 2018, they intend to keep living in the same area they're currently living in for the next five to 10 years. 

Gen Y and Z consumers reported higher propensity for saving each month relative to older generations, which could be a potential tailwind for discretionary spending. And travel remains a top priority across age cohorts, which sets the stage for ongoing travel strength and favorable cross-border trends for the major credit card providers. 

In addition to all these findings, our analysis suggests several surprising facts. For example, our survey results contradict the widely accepted notion that younger generations are "credit averse." The vast majority of Gen Z consumers have one or more traditional credit cards – at a similar rate to Gen X and Millennials. Although traditional credit card usage is higher among Millennials and Gen Z than it was in 2018, data suggests this is driven by convenience, not financing needs. Younger people’s borrowing is primarily related to auto and home loans from traditional lenders rather than fintechs. 

Another unexpected finding is that while Gen Y and Z are more drawn to online banking than their predecessors, about 75 per cent acknowledge the importance of physical branch locations – and still prefer to bank with their traditional national, regional, and community banks over online-only providers. What’s more, they also believe physical bank branches will be important long-term. 

Overall, our analysis suggests that generations tend to maintain their key priorities as they age. Whether this pattern holds in the future is something we will continue to watch.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

With the US election as a backdrop, our Head of Corporate Credit Research Andrew Sheets tells three stories that help encapsulate the state of global credit markets.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll go around the credit world in three short stories. 

It's Thursday, October 31st at 2pm in London.

The US election next Tuesday continues to be a top issue on investor minds, and indeed is a top issue for us here at Thoughts on the Market, where it’s dominating your feed over this week. 

For credit, our positive view this year has been closely tied to the idea that the asset class likes moderation. For example, in data released yesterday the US economy grew a solid 2.8 per cent in the third quarter, while core inflation moderated to just 2.2 per cent, close to the Fed’s target. And Morgan Stanley’s forecasts for the rest of this year and next see that pattern continuing: Solid US Growth, falling inflation, driving steady further rate cuts from the Federal Reserve and all creating a better-than-expected backdrop for credit that should support tighter than average spreads. 

That idea that credit likes moderation is core to how we view the election. Outcomes that could drive larger changes in economic policy, domestic policy or foreign policy, are all larger risks. And outcomes that could drive more moderate outcomes across all of these factors are likely going to be better for credit, in our view. 

But you may also be tired of hearing about the election. And so for you, here is a quick tour of the credit world in three non-election stories. 

In Asia, Korea will be added to the FTSE World Government Bond Index, an important benchmark for global bond investors. This has significant implications across Korean assets, but for Credit, it may be most important for sparking more interest in Corporate Bonds denominated in local Korean Won.

This is a larger market than investors may initially realize, totaling roughly $1 trillion US equivalent in size. And meanwhile, the exposure of foreign investors to this market is historically low. A large market with little global exposure is a potential opportunity. 

Moving to Europe, you could be forgiven for thinking the mood is pretty dour. Growth has been weaker than in the United States, while the US Election is raising questions around everything from disruptions to trans-Atlantic trade, to the future of NATO, to the war in Ukraine. 

But over the last month, flows into European credit have been extremely good. Per work by my colleagues, inflows into European credit have reached record levels over the last several months. The start of rate cuts leading investors to lock in still-attractive all-in yields in Europe is a big part of this story. 

Finally, in the US, we continue to see remarkable shifts in the ease with which investors can trade large volumes of corporate bonds. So-called portfolio trading, where investors buy or sell bonds as a group, continues to grow, with September seeing a new all-time high in activity. Year-to-date, through September, we estimate that roughly $760 billion – with a ‘b’ – has been traded this way. It’s never been easier to trade very large volumes of corporate bonds. 

The US election on November 5th will continue to dominate investor focus over the coming days. As it should. Credit has been an enormous beneficiary of the recent backdrop that’s seen solid growth, moderating inflation, and moderating policy rates. The vote will have an important bearing on whether that moderation continues, or if something new takes its place. 

But away from the election there are other important things happening. Korea’s Local Currency Corporate bond market is a large, underinvested market that may get more attention after index inclusion. European Credit is seeing record flows despite its macro uncertainties, an indicator of underlying investor demand. And in the US, the continued rise of portfolio trading is re-shaping market structure and improving the ability to trade ever larger volumes of corporate bonds. 

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today. 

Oh, and Happy Halloween.

Our Global Head of Fixed Income and Thematic Research, Michael Zezas, outlines how investors should navigate the closing days of the presidential campaign -- including a vote-counting period that could extend past Election Day.

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Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today is going to be a little bit different. We’re exactly six days away from the US election. The race is neck-and-neck, and I want to sketch out what investors should expect in the next couple of weeks. 

It’s Wednesday, October 30, at 10 AM in New York.

This is an historic election, and the outcome remains highly uncertain. What’s more, there’s a good chance we won’t know the winner on election night due to close vote counts. My colleagues and I have spent a lot of time on this show trying to give our listeners a sense of how the election might impact different economies around the word as well as markets, sectors, and specific industries. But today I want to take a step back and highlight a few things that investors should keep in mind right now. 

To sum up what we’ve covered so far: The key policies at stake are taxes, tariffs, and immigration. Congressional composition will be critical in determining the extent of tax cut extensions in either win outcome. Domestic, consumer-oriented sectors are most exposed to tax changes, while clean-tech is the most exposed to potential efforts at a repeal of the Inflation Reduction Act. Macro impacts vary depending on the scope of policies and their sequencing, but we see downside risks to growth in a Republican win outcome. 

As our listeners know, a candidate needs 270 Electoral College votes to win. Former President Trump’s most likely path to victory is through the Sun Belt – Arizona, North Carolina and Georgia; while Vice President Harris’ most likely path to victory is through the so-called Blue Wall – Michigan, Wisconsin and Pennsylvania. 

In terms of the Senate, polling and prediction markets have consistently implied higher likelihood of Republicans winning control. Democrats are defending more seats in states that Trump won in 2020, as well as more seats in states Biden won by a small margin. As far as the House of Representatives, Republicans need 11 of the 25 toss-up seats to maintain control of the House, and Democrats need 15. The generic ballot is the most reliable House indicator, in our view. It’s a political poll which asks not which candidate you plan to vote for to represent you in Congress, but rather which political party – Democrat, Republican or Independent – that you would support. The generic ballot historically correlates with the House winner, and it currently favors Democrats. 

All this leaves us with two key takeaways: 

First, don’t expect conclusive results on election night. Early vote data from key states reflects our view that vote-by-mail levels are lower than in 2020 but still elevated versus historical levels. And it may take days to get all the mail-in votes counted. 

Second, full election results may differ from early returns. Why is that? A candidate may have a deficit in election night vote counts but still come back to win the race once all ballots are counted. This depends on two key variables: The share of the electorate who vote by mail; and the skew among those ballots toward Democrats – a blue shift – or Republicans – a red shift. 

So again, we need to be patient and wait for the final results. And when that happens, we will start digging deep into the post-election outlook for the economy and markets. 

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

Our U.S. Public Policy and Valuation, Accounting & Tax strategists assess the possible scenarios in the upcoming elections, and what they could mean for both taxpayers and the market.

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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's US public policy strategist.

Todd Castagno: And I'm Todd Costagno, Head of Global Valuation, Accounting, and Tax Research at Morgan Stanley.

Ariana Salvatore: With less than a week to go until the US election, the race is still neck and neck. Today, we dig into a key issue voters care about: Taxes.

Todd Castagno: It's Tuesday, October 29th at 10am in New York.

So, Ariana. Taxes are an issue that impact both businesses and individuals. It's a key component of both candidates plans and proposals. How have they evolved over the campaign?

Ariana Salvatore: I'd say in general we do tend to see a lot of overlap between Harris' proposals and the ones that the Democrats were campaigning on before she took over the mantle from President Biden in July. That being said, in some instances, her plans go beyond what was requested in the president's fiscal year [20]25 budget request.

For example, that $6,000 credit for newborns and the $25,000 homebuyer tax credit. These are areas where we've seen her campaign go beyond the scope of what Biden was campaigning on while he was still in the race. Of course, it's important to remember that any of these proposals would have to pass muster in a Democrat controlled or a split Congress – meaning that there will be some tempering of these plans at the margin.

Todd Castagno: So former President Trump campaigned in his first election on tax policy. He's campaigning on tax policy in his current campaign. What are his plans and views?

Ariana Salvatore: We've been talking about the Republican sweep outcome as the most deficit expansionary from tax policy changes because Republicans understandably have more fealty to the 2017 Tax Cuts and Jobs Act.

That law is set to expire by the end of next year. So, in a Trump win scenario plus Republican Congress, we think you can get most of that 2017 law extended. While in a Trump win scenario with divided government, it's probably a little bit narrower. In general, as I said, deficits skew larger in Republican win outcomes for that reason, with an asymmetry across the other election scenarios. That being said, we do still expect to see deficit expansion in 2026, regardless of who's in power, because these tax cuts will be extended one way or another.

But Todd, you've done a lot of work in this area and there are some substantial impacts from a potential corporate rate increase to think through. Can you give us a little bit of detail on what that kind of increase would mean for stocks and bonds?

Todd Castagno: Yeah. So, investors have been very focused on the rate and where it matters and where it does not matter. So, if you really think about it, most companies that are exposed to a rate increase or decrease are domestic oriented, consumer companies, retail companies, you know, hospital facilities, industrials; those are the most exposed to a rate increase.

Multinationals this time around are less exposed. So, if we go back to 2017, we think about it; that was a different story. We had $2 trillion of trapped cash on the sidelines that did come back – buybacks, dividends, corporate hiring. You know, this time around, that's a different story. So there is exposure but it's mainly consumer-oriented companies.

Ariana Salvatore: That makes sense. And you mentioned the 2017 almost as a blueprint for what we saw last time. You mentioned dividends and buybacks.

Do you have any sense of how this time around could be different? What do we think companies would likely spend these tax cuts on?

Todd Castagno: Well, there are tax cuts. I do think it's going to be different. I do think the $2 trillion does not exist. That's not going to happen. So, you're going to have fewer buybacks, fewer dividends. But you could see some changes in employment. You could see some changes in investment. Things like upfront expensing could help boost the economy, higher jobs, et cetera.

One thing, Ariana. You know, tax cuts are expensive. I think that's what we've all contemplated for almost 10 years now. How are we going to pay for these in this new world?

Ariana Salvatore: Well Republicans have proposed a few different pay forwards. But to your point, we're not in the same environment as 2017, and we don't expect to see the same ones that were part of the original Tax Cuts and Jobs Act negotiations this time around. Specifically, former President Trump has talked about not extending the SALT cap, which was a revenue raiser that capped the amount of deductions some individuals could take between state and federal taxes. That provision raised about $900 billion over 10 years.

Republicans in general are mainly focused on peeling back some parts of the IRA – or the Inflation Reduction Act – as a cost saving measure, as well as letting some of the tax cuts from the 2017 law roll off.

We contrast that with the Democrat sweep outcome, where we could see a corporate rate increase to 25 per cent in our view, in spite of Harris’ pledge to bring it up to 28 per cent from the current 21 per cent.

Todd Castagno: So, we could talk about the Inflation Reduction Act for a second. You know, that was a bill that was designed to bring energy, clean energy manufacturing back to the United States.

It was a very large bill; it was partisan. But what do we think about in this next election outcome of actually repealing some of those items?

Ariana Salvatore: It's a great question. And Republicans on the campaign trail have been talking a lot about peeling back the IRA. Importantly, in our view, we don't think a full-scale repeal is likely even in a Republican sweep outcome. There are a few reasons for that, but mainly because if you look at where these projects are being located, it's in Republican held states and districts. And Republicans in the house currently have said that they're not interested in rolling back the law. That being said, there are ways to potentially cap the amount of outstanding money that has not yet been allocated.

And the president could work with the treasury or other federal agencies to tighten up some of the criteria or the guidance around accessing some of the tax credits that will limit the overall deployment.

Todd Castagno: I think the recent Supreme Court decision also plays into that.

With candidates’ tax plans – I’ve run a lot of numbers from a company perspective. You've run a lot of numbers top down from a deficit perspective. What did you come to view?

Ariana Salvatore: We do see deficits expanding in 2026 and beyond. That's because, in our view, it's not really in lawmakers’ interest to allow all of the tax cuts – both individual and corporate – from 2017 to expire. We think the largest extension, as I mentioned before, comes in a Republican sweep. But in general, in some form or another, we think that at least a portion of these lower tax rates are going to stay around.

That adds $2.8 trillion to the deficit over 10 years on the high end per our estimates; and $700 billion over 10 years in our smallest expansion scenario, a Democrat sweep.

So finally, Todd, in either win outcome, what's the timeline of key tax-related events that investors should be paying attention to?

Todd Castagno: So, this is the trillion-dollar question. So, most of the individual side of the tax cuts and jobs act expires at the end of 2025. There are certain business provisions that have already started to phase out. There are certain provisions that are permanent, like the corporate rate.

When will Congress get to this? They will get to it at some point, but we just don't know when that is. Could it be early 2025? Could it be 2026? And I think investors should pay attention to that because Congress doesn't always act on time; and we also don't know what the extensions will look like. Some things could be extended three years, five years, 10 years. Some things could be permanent.

So that's the jigsaw puzzle that we'll have to put together after the election.

Ariana Salvatore: Great. Well, I guess three things in life are certain – death, taxes, and the fact that we will be following this issue very closely.

Todd, thanks so much for taking the time to talk.

Todd Castagno: Great to speak with you.

Ariana Salvatore: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen and share the podcast with a friend or colleague today.

As the U.S. presidential race continues to be neck and neck according to opinion polls, our Chief Fixed Income Strategist considers the possible market implications if some policies proposed during this campaign are implemented.

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Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about understanding market dynamics against the backdrop of U.S. elections. 

It's Monday, Oct 28th at 1 pm in New York.

The outcome of the U.S. elections, now just over a week away, has been at the center of every discussion I have had in the last several days. There have been significant moves, not so much in the opinion polls – but in prediction markets. In the opinion polls, the presidential race remains tight and neck-to-neck in key swing states with poll numbers well within the margin of error. But some prediction markets have shifted meaningfully toward Republicans in the contests for both the presidency and control of Congress. 

Financial markets have also moved a lot. Stocks exposed to a Republican win outcome have risen a fair bit. 

To understand the potential policy changes that can have an impact on markets, I think it is crucial to understand the sequencing of those policy changes. 

Given the moves in the prediction markets, let us first frame a Trump win scenario. It seems reasonable to bucket the possible shifts into three categories – fiscal policy, immigration controls, and tariffs. 

Meaningful changes in fiscal policy require control of both houses of Congress; and even in a Republican sweep, scenario legislation would still be time-consuming and likely come last. We don’t really have many details on how changes to immigration policy would be implemented and so their timing remains very unclear. On the other hand, given broad presidential discretion on trade policy, Trump’s expressed intentions in his campaign messaging, and the precedent of his first term, tariff changes would likely come first.

Our economists have looked at the potential impact of tariffs on the economy. They concluded that broad tariffs imply downside risks to growth through declines in consumption, investment spending, payrolls, and labor income, and upside risks to inflation. Their estimates suggest that imposing all the tariffs currently under discussion could result in a delayed drag of -1.4 per cent on real GDP growth and a more rapid boost of 0.9 per cent to inflation. 

How do we reconcile the equity market’s reaction to the increasing odds of a Trump win in some prediction markets with the idea that there will be a drag on GDP growth and boost to inflation that our economists assess? 

Two explanations. Markets could be counting on the prospect that all tariffs would not be imposed. Or at least would be sequenced over an extended period, with some coming much later than others. Also, markets could be putting greater emphasis on the revival of “animal spirits” driven by expectations of regulatory easing, which is hard to define or quantify.

Let us look at other markets. 

In the bond markets, treasury yields have risen notably in the last month. Many investors see the Republican sweep outcome as most bearish for US Treasuries, based on the experience of the 2016 election. As Matt Hornbach, our global head of macro strategy has noted, there are meaningful differences between the Fed’s monetary policy today and the pre-election period in 2016, suggesting that any rise in Treasury yields would be more contained this time, even in a Republican sweep outcome. 

In 2016, markets were pricing in about 30 basis points of rate hikes over the next 12 months. Contrast that to the current market expectation of about 135 basis points in rate cuts over the next 12 months. Also, in the year after the 2016 election, expectations for the Fed Funds Rate rose nearly 125 basis points. A similar rise in expectations for Fed policy now would require market participants to expect the Fed to stop cutting immediately; and refrain from further cuts through 2025. This seems like a remote possibility – even under a Republican sweep elections scenario. 

Given the recent moves across markets and the expectations they are pricing in, markets may now be somewhat offside should Harris win, as they would have to reverse the course. 

Elections are a known unknown. Based on opinion polls, this race remains extremely tight, and multiple combinations of presidential and congressional outcomes are very much in play. We must also contend with the prospect that determining the outcome may take much longer this time.

Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

After decades of offshoring, the pendulum for US manufacturing is swinging back toward domestic production. Our US Multi-Industry Analyst Chris Snyder looks at what’s behind this trend.

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Welcome to Thoughts on the Market. I’m Chris Snyder, Morgan Stanley’s US Multi-Industry Analyst. Today I’ll discuss the far-reaching implications of shifting industrial production back to the United States. 

It’s Friday, October 25th, at 10am in New York.

Global manufacturing is undergoing a seismic shift, and the United States is at the epicenter of this transformation. After decades of offshoring and relying on international supply chains, the pendulum is swinging back toward domestic production. This movement – known as reshoring – is not just a fleeting trend but a strategic realignment of manufacturing capabilities that is indicative of the “multipolar” theme playing out globally.

In fact, we believe the US is entering the early innings of re-Industrialization – a multi-decade opportunity that we size at $10 trillion and think has the potential to restore growth to the US industrial economy following more than 20 years of stagnation. 

The reshoring of manufacturing to the US is fueled by a combination of factors that are making domestic production both viable and lucrative. While the initial sparks were ignited by policy changes, including tariffs and trade agreements, the COVID-19 pandemic laid bare the risks of elongated supply chains and over-dependence on foreign manufacturing.

Meanwhile, the diffusion of cutting-edge technologies, such as automation, artificial intelligence, and advanced robotics, has diminished the cost advantages of low-wage countries. The US -- with its robust tech sector and innovation ecosystem -- is uniquely positioned to leverage technology to revitalize its manufacturing base. 

Who are the direct beneficiaries? High-tech sectors, such as semiconductors, pharmaceuticals, and advanced manufacturing systems, are likely to be the biggest winners. Traditional industrial sectors, such as automotive and aerospace, are also seeing a resurgence. Finally, companies that invest in more sustainable manufacturing processes stand to gain from both policy-driven incentives and a growing market demand. All told, these businesses should see shorter supply chains, reduced legal and tariff costs, and a more resilient operational structure. 

As for the broader US economy? We think the implications are pretty profound. In altering the US industrial landscape, reshoring promises not only to boost GDP growth, but it could also stabilize and potentially reverse the trade deficits that have plagued the US economy for years.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Morgan Stanley’s European Head of Research Product Paul Walsh speaks to Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, European Asset Managers Diversified Financials Analyst, about the implications of increasing life expectancy for the financial industry.

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Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product, and today we dig into a topic that really affects us all. Retirement.

Life cycles are extending as people are living longer, healthier lives. Coupled with government pension funds that are increasingly under pressure, this means that consumers will need to build much more robust investment plans to substitute for salaries to carry them through a longer retirement.

And to understand more about the changing financial needs and challenges of an aging population, I'm delighted to be joined by my colleagues, Betsy Graseck, Global Head of Banks and Diversified Finance, and Bruce Hamilton, our European Asset Managers Diversified Financials Analyst.

It's Thursday, October the 24th at 3pm in London.

Betsy Graseck: And it's 10 am in New York.

Paul Walsh: Now Bruce, let's start with you. As people live longer, they will likely spend more time in retirement. Managing and ensuring retirement income over a longer duration could have a significant impact on asset management. What are the broad trends you're seeing in the industry right now?

Bruce Hamilton: So, the asset management industry in large part has focused on the accumulation phase of investors journey. Whilst this remains critical as people build assets for retirement – and we see growing allocations from affluent investors to private markets as a trend which is likely to be reinforced by the aging theme – there's a significant need for decumulation products and solutions that can offer returns and income over a prolonged retirement.

We see a lot of innovation as asset managers look to develop products to meet this need.

Paul Walsh: So Betsy, people are living longer. How ready are consumers for retirement? Are most retirement plans or similar financial services ready to handle this challenge?

Betsy Graseck: Some are ready. But given how rapidly the global population is aging, there is an increasing need to provide solutions to individuals. Just to put a number on it, the global population that is 65 years old or older in the year 2000 was only 7 per cent. This is set to hit 10 per cent next year in 2025 and 16 per cent in 2050. All groups need service and advice – with the affluent group needing the most increase in services especially if government pension funds come under more pressure.

Paul Walsh: So, I think you set the scene really well there, Betsy, and I guess the obvious question is, how can wealth and financial planners best respond, do you think? Is it by creating new products? Or do we need a much deeper transformation?

Betsy Graseck: We see individuals today having a wide range of retirement choices. What we feel they really need here is personalized, customized advice, delivering solutions that can address their unique needs. These span from affluent individuals needing salary replacement strategies to high-net-worth individuals looking for philanthropic and wealth transfer strategies. A focus on integrated, personalized advice, innovative products, and high-quality service that meets clients as they wish to connect effectively will be critical.

Paul Walsh: It seems to me that it is – but is this a positive for the financial services sector? And if so, what do you think is the size of this revenue opportunity and over what time period do you think?

Betsy Graseck: Well, the way we've looked at this is across the global asset manager and global wealth manager industry, as they will be the ones called upon to address these needs. And we do see a roughly 30 per cent uplift in global revenues by 2028, which equates to [$]400 billion in incremental revenues across the global industry.

And that is driven by the expansion of individuals looking for advice, in particular from the affluent group, as well as an increase in fee-based products to address the income needs.

Paul Walsh: And there's some big numbers that you've quoted there, Betsy. So let's dig into the financial subsector and industries. What are the biggest untapped opportunities there?

Betsy Graseck: Well, the number one is the affluent customer base that we do see having the biggest need for advice, relative to advice seeking today. And as that group, reaches out and receives advice from wealth channels, that is one major driver here. The second driver is the increase in fee-based products to service the income replacement needs.

Paul Walsh: And what are the biggest challenges do you think? Obviously, we've talked about the opportunity there, but the biggest challenges to financial services that you see along the way.

Betsy Graseck: Well, the way I think about this is what is required to be a winner, and the winners need to be able to integrate their entire organizations to deliver for clients. And also leverage technology efficiently and effectively to be able not only to deliver the highest quality service in the way the client wants to be serviced; but also to optimize cost structures, which then can get reinvested – you know, higher pretext getting reinvested into the business.

The challenges are the opposite of institutions that remain siloed and institutions that have, you know, maybe a tech strategy that is not set to respond to the needs of this client set.

Paul Walsh: Thanks for that, Betsy; and Bruce, I just want to pivot back to you. Some asset managers are partnering with insurance companies to offer guaranteed income streams and wealth transfer solutions. What are some of the successful models that you've seen so far?

Bruce Hamilton: So, asset managers are adopting a range of approaches. Some have acquired insurance subsidiaries, some have taken significant minority stakes, while others have looked to deepen partnerships with insurance. Trade offs include the degree of control versus the capital intensity that ownership of insurance brings. So, we see more than one route, but a continued push towards greater collaboration between asset managers and insurers.

Given the potential for the asset managers to access stable, permanent capital, that can then be deployed in a range of investment strategies to offer diversified sources of income via private or structured credit to support returns for the end insurance clients.

Theoretically, the best place models to deliver retirement solutions will have elements of wealth advice, plus a hybrid asset management insurance product approach. Given the importance of providing investors with regular and variable income, a guaranteed minimum level of income, plus an ability to generate a return to offer potential for legacy to pass to heirs.

Paul Walsh: And of course, Bruce, it's very difficult to talk about product innovation, without bringing in the topic of AI. As asset managers are working to create ever more personalized retirement solutions as we've heard, how and to what extent do you think they are leveraging AI?

Bruce Hamilton: So, our interviews with a range of management players confirmed that many of the potential use cases being worked on 12 months ago have now been put into production. It's still early days, and so far, most use cases are focused on areas that can drive efficiencies.

So, for example, in RFP report writing, synthesis of research, and some of the middle and back-office processes for asset managers. But over time, AI can clearly feed more bespoke client service by wealth and asset managers with areas such as customized investment proposals and financial planning offering potential.

Paul Walsh: Fascinating topic. Betsy and Bruce, thank you so much for taking the time to talk.

It's clear that increasing lifespans are reshaping the financials sector by driving product innovation, influencing asset allocation strategies, and, of course, creating new market opportunities.

And to our listeners, thanks as always for taking the time to listen in. If you enjoy Thoughts on the Market, please do leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.