Morgan Stanley's chief US equity strategist, Mike Wilson, has identified a potential threat to the ongoing stock market rally: a stronger US dollar. Wilson believes that if the dollar were to strengthen again, it could slow down the pace of new record highs that the market has been experiencing. This concern arises as the dollar has gained about 2% against a basket of rival currencies this month, reflecting investors' expectations of a slower easing cycle from the Federal Reserve.
Wilson points to the recent increase in US dollar liquidity, driven by expanded balance sheets in China and Japan as well as a weaker dollar over the past two years. This reversal in the dollar's strength could interrupt the rally that has been supported by easing policies from major central banks, including the US and China.
The stock market recently celebrated its two-year anniversary of the bull rally, with major indexes hitting record highs. Wilson attributes the market's gains to policy-driven factors and notes that the rally is broadening out. However, he highlights the risk of a potential shock on the economic or liquidity front that could impact the market's trajectory.
Despite the upcoming presidential and congressional elections, Wilson believes that the rally is not threatened by political uncertainties. He suggests that the real risk may emerge when the bond market faces pressure from fiscal deficits. However, he acknowledges the uncertainty of when this might occur and remains optimistic about the current bull market.
In conclusion, Wilson's analysis underscores the delicate balance between policy-driven market gains and potential risks such as a stronger US dollar and fiscal deficits. While the market continues to hit new highs, investors should remain vigilant and monitor these factors for any potential impact on the ongoing rally.