US Equity Strategy and US Economics | September 2, 2014
September 2, 2014
US Equity Strategy and US Economics
2020 Vision: Long Live the
Expansion
MORGAN STANLEY & CO. LLC
Adam S. Parker, Ph.D
Adam.Parker@morganstanley.com
+1 212 761-1755
Ellen Zentner
Ellen.Zentner@morganstanley.com
+1 212 296-4882
The US expansion is more than five years old, but
business cycles don't die of old age. Herein we
discuss why this could be the longest US expansion
ever, and how to gauge when it could end.
We believe a prolonged period of deleveraging in the US, coupled with an
uneven global recovery, are just two of the reasons why this could prove to be
the longest US expansion – ever. Supporting our theory are:
The world economy is not in sync. Major regional economies are at
different points along the growth cycle. In general, DM is leading while
EM is lagging.
Volatility in the US continues to trend lower, which can extend the life of
expansions.
Deleveraging in the US is ongoing, albeit largely complete, and balance
sheet priorities have shifted.
Interest payments on debt burdens are ultra-low, and household debt
dynamics suggest there exists a sizable cushion protecting consumers in
a rising interest rate environment.
Capital spending and inventories do not look stretched.
Corporate management hubris and other corporate metrics of
overheating remain muted.
Several broad economic indicators in the US have only just reached
“normal” expansionary levels and are far from looking unsustainable.
Taken together, evidence suggests the US cycle peak is far from imminent. And
as we highlight below, our Cross Asset Strategy team's assessment of cycle
timing also pegs the US in the very early stages of expansion.
The US Equity Strategy team believes that equities should benefit from a
scenario where the probability of a cycle peak remains low for some time. As
the prolonged expansion becomes more visible, we'd expect a materially
higher US stock market. Our best guess is that an S&P500 peak of near
3000 is possible should the US expansion prove to have five or more
years left to it, based on 6% per annum EPS growth through that time
frame and a 17x price-to-earnings ratio.
The US Equity Strategy team remains bullish on US equities and will continue
to monitor the metrics we discuss below for signs of peak-ish behavior. As
always, the US Economics team will parse leading indicators of the business
cycle as they evolve, and pay particularly close attention to movements in
MSRISK – Morgan Stanley's recession risk model.
Note: Ellen Zentner is an economist and is not opining on equity securities.
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a result,
investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of Morgan
Stanley Research. Investors should consider Morgan
Stanley Research as only a single factor in making their
investment decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
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The Global Economy - Out of Sync
The US expansion has lasted more than five years, prompting an oft asked question - how long could it last? If
investors' concern is founded on age alone, then rest assured there simply is no age component involved when
modeling the length of a business cycle. Instead, business cycles tend to die of overheating (excessive hubris and
debt), oftentimes accompanied by a bubble-popping response of monetary policy (when real short rates have
moved significantly above the natural rate in response to inflation rising). Other events have also precipitated
downturns in the US. For example, abrupt and sharp increases in oil prices played a key role in the recessions of
1973-75, 1980-81, 1990-91, 2001, and 2008-09. We highlighted in previous research the oil price impact on US
GDP and why the US, while not immune, has become less sensitive to these price changes (see The Impact of
Higher Oil Prices, June 20, 2014). To be sure, there have been myriad causes of US recessions, and no business
cycle has precisely matched the last.
The Financial Crisis that hit in autumn 2008 sent global financial markets reeling and sparked a prolonged
period of deleveraging that began in the United States, then spread throughout the world's developed
economies. Faced with a Herculean task of turning around broken markets, central banks stepped in with
unprecedented monetary policy accommodation, precipitating a prolonged period of ultra-low interest rates.
Six years beyond the financial crisis, the global economy continues to feel its effects and growth is uneven.
While deleveraging in the US is largely complete, Europe is not nearly as far along. Economic activity in certain
sectors of the UK is looking frothy, but Japan's near-term outlook is clouded by uncertain fiscal outcomes.
Growth in Brazil is troubling while growth in India and China appears to be bottoming and Mexico is turning
upward. All this is to say that positioning along the global growth cycle is uneven, and such an
unsynchronized global recovery may have the effect of prolonging the current economic expansion.
With regional economies at different stages of the business cycle, the risk of global overheating is likely lower
than it would be were all the G10 economies expanding strongly in concert. In developed markets, monetary
policy accommodation remains an important prop for growth, and as central banks increasingly, albeit
grudgingly, acknowledge lasting damage to potential GDP, the promise of low rates for longer has
solidified. Those low rates, coupled with deleveraging in the wake of the financial crisis, has allowed
households and corporations, particularly in the US, to rebalance. Indeed, debt burdens and delinquency rates
continue to move downward, not upward.
The most recent three expansions have been among the longest in US history. Post-WWII expansions have
lasted an average of five years, while the three most recent have lasted an average of eight years. As we discuss
below, the longest expansion lasted ten years. An environment of low volatility can help extend the life of
an expansion, and volatility in GDP growth has fallen over time (Exhibit 1).
Exhibit 1 maps volatility in GDP as the 4-quarter rolling standard deviation in the 2-quarter smoothed annual
rate of growth. To be sure a complicated calculation, but it clearly shows that longer expansions have occurred
alongside diminishing volatility of GDP.
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Exhibit 1: Less Volatility in Trailing GDP May Portend Longer Expansions
So u rce: B u reau o f Eco n o mic An alysis, Mo rgan Stan ley Research . No te: G ray sh adin g den o tes p erio ds o f recessio n as determin ed b y th e Natio n al
B u reau Eco n o mic Research .
While the concept of a business cycle applies globally, herein we focus primarily on the US, where we highlight
household and corporate balance sheet dynamics, investment and the inventory cycle, as well as the credit cycle
to provide evidence of why we think the US business cycle is very early in the stage of expansion, and
why this could prove to be the longest economic expansion – ever.
Defining the Business Cycle
In the US, the National Bureau of Economic Research (NBER) is the official arbiter of business cycle dating. The
duration of a cycle is determined by gauging the peak-to-peak or trough-to-trough in economic activity. Since
the 1850's, the US economy has experienced 33 cycles, 11 of those in the post-WWII period. Since WWII,
business cycles have lasted an average 69 months, with expansions averaging 58 months (or just under 5
years) and contractions lasting an average 11 months (or just under a year). The longest expansion lasted
120 months (or 10 years from March 1991 to March 2001). Exhibit 2 provides a historical look at real GDP
growth in the US with periods of recession shaded in gray.
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Exhibit 2: Post-WWII Expansions Have Lasted an Average 58 Months
So u rce: B u reau o f Eco n o mic An alysis, Mo rgan Stan ley Research . No te: G ray sh adin g den o tes p erio ds o f recessio n as determin ed b y th e NB ER.
Recession Through the Eyes of the NBER
When determining a peak in the business cycle (i.e., when the expansion has ended and the US economy is
entering recession), the NBER looks at a range of indicators, placing the greatest emphasis on higher-frequency
monthly indicators as opposed to simply using GDP growth as a gauge. A long-held misconception is the “twoquarter” rule of thumb, where declining real GDP growth for two consecutive quarters indicates the start of a
recession. But the two-quarter rule would have only indicated 14 quarters of recession in the postwar period,
whereas the NBER has identified 41.
To date the end of expansion, the NBER looks for a “significant decline in activity” across a number of indicators
that includes industrial production, real retail sales, real personal income (excluding the effects of government
transfers), and most importantly, jobs. These indicators are shown in Exhibit 3 below, and importantly, all
continue to expand at moderate paces.
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Exhibit 3: Key Indicators of the US Economy Continue to Expand
So u rce: Federal Reserve, B u reau o f Lab o r Statistics, B u reau o f Eco n o mic An alysis, Cen su s B u reau , Mo rgan Stan ley Research
Slower, But Longer
With the US economy having entered recovery in July 2009, the current recovery has lasted a little over five
years thus far - prompting the question, how long could this expansion last? To be sure, five years is a bit
longer than the postwar average, but about half the length of the longest expansion. The shadow of the
financial crisis lingers over the US economy, expressed primarily through deleveraging of private debt. Indeed,
an historical exploration of financial crises among developed countries indicates that the credit-to-GDP ratio
balloons in the 10 years leading up to financial crises, and that the retrenchment tends to last as long as the
surge in credit.[ 1 ]) Further, in the decade following the financial crisis, deleveraging of private debt damps credit
and employment growth (and lasts for about 7 years), resulting in GDP growth that is about one percentage
point lower over that time.[ 2 ]
We view this period of deleveraging as a “repair phase” of the business cycle, and its unusual length this
time owes to the aftershocks that follow in the wake of financial crises. We believe that the US economy has
largely completed the repair phase and is entering the very early stages of expansion. Indeed, our
Cross-Asset Strategy team headed by Andrew Sheets recently introduced a US Cycle Indicator (Exhibit 4) that
also indicates the US is in the early stages of expansion.
Morgan Stanley's US Cycle Indicator is derived from data on employment, credit conditions, corporate
aggressiveness and the yield curve. The indicator level is based on the deviation of these metrics from their
long-run trend (see Cross-Asset Dispatches: Introducing Our Framework, August 5, 2014).
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Exhibit 4: Our Cross Asset Team's US Cycle Indicator Indicates the US Is in the Early Stage of Expansion
So u rce: B lo o mb erg, NB ER fo r recessio n sh adin g, Mo rgan Stan ley Research No te: Percen tile deviatio n fro m tren d
Perhaps the strongest opinion of where the US economy is positioned along the business cycle is expressed by
America's households. The US economy entered recovery in July 2009, but for nearly five years since that time,
US households continually asked themselves, “what recovery?” To view the recovery through the lens of
America’s households, we look at the behavior of the Conference Board’s monthly consumer confidence index
over the business cycle (Exhibit 5).
After plummeting to a new historical low of 25.3 in February 2009 (prior to the financial crisis the low had been
43.2 in December 1974) confidence finally surpassed 80 in March 2014. A level around 80 has been the average
measure of confidence during past recoveries, implying that it took US households nearly 5 years for the
recovery to feel like a recovery - 5 long years of repair.
In August, consumer confidence increased further to a reading of 92.4, approaching the level of 100 that is
considered the normal average during expansions.
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Exhibit 5: Consumer Confidence Is Only Just Moving Back to Historically Normal Levels
So u rce: Co n feren ce B o ard, Mo rgan Stan ley Research . No te: G ray sh adin g den o tes p erio d o f recessio n as determin ed b y th e NB ER
Consumer confidence is just one example of an economic indicator that has only recently moved back into its
normal range in expansions. Weekly initial jobless claims is another such indicator, and at around 300,000 it has
now reached a level indicative of a normal labor market expansion. As the US economy continues along its
transition from a phase of repair to expansion, more economic indicators should fall in line with
historical norms.
Deleveraging and Debt Dynamics
US households have aggressively delevered, with debt as a share of disposable income declining sharply from
an historical high of 135% on the cusp of recession to where it has stabilized over the past several quarters
around 108%. Exhibit 6 below expresses this relationship as a ratio and underscores the unprecedented
shedding of debt. Indeed, outside of mortgage debt, the household deleveraging cycle is nearly complete.
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Exhibit 6: Ratio of Debt-to-Disposable Income Has Fallen Back Near Pre-Bubble Levels
So u rce: Federal Reserve, Mo rgan Stan ley Research
Declining debt alongside ultra-low interest rates has led to a financial obligation ratio that's not been seen since
the early 1980s - an indication that household leverage has reached a sustainable balance (Exhibit 7). The
financial obligation ratio measures regular out-of-pocket monthly obligations, such as rental or mortgage
payments, credit cards payments, etc., as a share of disposable income.
Exhibit 7: Households Are Devoting a Smaller Share of After-Tax Income to Monthly Obligations - Further
Evidence a Cycle Peak Remains Far Off
So u rce: Federal Reserve B o ard, Mo rgan Stan ley Research . No te: Th e fin an cial o b ligatio n s ratio (FO R) in clu des au to lease p aymen ts, co n su mer deb t
p aymen ts, ren tal p aymen ts o n ten an t-o ccu p ied p ro p erty, p aymen ts o n mo rtgage deb t, h o meo w n ers’ in su ran ce an d p ro p erty tax p aymen ts.
The easing of financial burden is also expressed in still-declining delinquency rates. In 2Q14, the overall 90+ day
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delinquency rate fell to 4.5%, the lowest level since early 2008 (Exhibit 8). Falling delinquency rates certainly do
not describe an environment in which households are re-leveraging. Moreover, the historically low financial
obligations ratio also implies households have plenty of room to add to debt levels before they become
unsustainable. These household credit conditions and lower delinquency rates increase our confidence
that the cycle peak is not near.
Exhibit 8: The Percent of Balance 90+ Days Delinquent Is at Multi-Year Lows
So u rce: Federal Reserve B an k o f New Yo rk, Mo rgan Stan ley Research
Household Balance Sheet in a Rising Interest Rate Environment
As the lingering effects of the financial crisis move further into the rear-view mirror, the Fed will need to begin
normalizing policy. When interest rates rise, how will the household balance sheet fare? Roughly 75% of the
household balance sheet is parked in mortgages (Exhibit 9), and about 90% of outstanding mortgages
are being held at a fixed rate.
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Exhibit 9: Roughly 75% of the Household Balance Sheet Is in Mortgages...
So u rce: Federal Reserve, Mo rgan Stan ley Research
A legacy of financial crises – long periods of low interest rates – is expressed in the gradual transformation of
the average yield on long-term fixed-income securities. Exhibit 10 charts the effective yield on all outstanding
mortgages alongside the 30-year fixed-rate mortgage rate. The effective yield has fallen to a historical low
of 3.9% – meaning that the bulk of the average household's balance sheet is locked in at an extremely
low fixed rate.
Exhibit 10: ...And the Effective Yield on All Outstanding Mortgages Has Fallen to a Historical Low
So u rce: B u reau o f Eco n o mic An alysis, Mo rgan Stan ley Research
While rising interest rates will, as intended, slow the creation of credit, households' outstanding debt today is
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largely protected in a rising interest rate environment. This cushion should help US households remain
more nimble should financial conditions tighten, dampening volatility in consumer spending and
thereby prolonging the expansion.
Capital Spending Dynamics
The US Equity Strategy team's bullishness regarding the equity market is based on the thesis that the
top of the cycle, or the end of the expansion, will be defined by hubris and debt. By hubris, we mean
some form of management spending gone awry. Hence, we monitor important metrics such as capital
expenditures and inventories. Should these remain at conservative levels it would likely mean the end of the
expansion is not imminent.
Relative to sales, capital spending in the US has trended lower since the 1980s (Exhibit 11), in part because of
new business models with high revenue like GOOGL or AMZN, which have relatively lower structural capital
requirements, and also in part due to greater focus on margins by Corporate America. The ratio has risen from
all-time lows, but we think notable further increases are unlikely. After excluding energy and utilities, capital
spending-to-sales is even more muted.
Exhibit 11: Capex-to-Sales Could be Peaking
So u rce: ClariFi, Th o mso n Reu ters, Mo rgan Stan ley Research
To be fair, capital-intensive businesses like autos and industrials (Exhibit 12) have shown an uptick since the
economic trough in 2009, but are still below both long-term averages and the peaks seen in prior cycles.
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Exhibit 12: Automobiles and Industrials Capex-to-Sales Has Come Down Over Time
So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research
The US Economics team has taken an in-depth look at business investment in the US and concluded that only a
modest cyclical pickup in overall capital expenditures can be expected (see Capex Outlook: Modest Is as Good
as It Gets, July 23, 2014). From a global perspective, capex-to-sales has held relatively steady in recent years
and is not expected to increase significantly (Exhibit 13). From the US stock market perspective, we think it
noteworthy that muted capital spending likely is a positive and that relatively speaking, capital
intensity is expected to pick up more outside of the US.
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Exhibit 13: Global Capex-to-Sales Is Below its Pre-Crisis Peak
So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research
Inventories
Inventories are a highly cyclical component of GDP, and volatile swings in inventories tend to magnify the
amplitude of swings in the business cycle. Though economic literature has been inconclusive in this regard, it is
possible that the inventory cycle is more muted today in the US, owing to such factors as the evolution of
technology in inventory control management and a rising share of companies that hold little physical inventory.
In the US, inventory-to-sales has risen from its crisis lows but remains contained (Exhibit 14).
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Exhibit 14: Inventory-to-Sales Is Contained in the US
So u rce: ClariFi, Th o mso n Reu ters, Mo rgan Stan ley Research
A diminishing inventory-to-sales ratio may also reflect the fact that the percentage of companies with no
inventory has increased over the past 30+ years (Exhibit 15).
Exhibit 15: The Percentage of Companies That Carry No Inventory Has Risen Drastically Since the Early
1980s
So u rce: ClariFi, Th o mso n Reu ters, Mo rgan Stan ley Research
Globally, the inventory-to-sales ratio has risen modestly since the financial crisis and is now creeping toward
multi-year highs (Exhibit 16). A key signpost of excess to monitor will be global inventory-to-sales over
the coming quarters.
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Exhibit 16: Global Inventories Have Risen Modestly Since the Crisis
So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research
The lack of a substantial build-up of inventory-to-sales, coupled with technological advances in real-time control
of inventory (helping companies remain nimble relative to unplanned changes in aggregate demand), and the
growing share of companies that hold no inventory, should dampen the cyclicality of the inventory cycle.
Corporate Debt Dynamics
Debt maturities have been pushed out until 2017 or later (Exhibit 17), as management teams have taken
advantage of the low cost of capital and ample capital availability. This is an important point as difficulty with
debt financing is often at the center of events that cause the end of expansions. The extended nature of
corporate financial obligations today is a key element in why we believe this expansion could be long-lasting.
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Exhibit 17: Many Debt Maturities Have Been Pushed Out and Don't Come Due Until 2017 and Beyond
So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research
While the total amount of debt due by US corporations is high, rolling over that debt is further out on the
horizon, and rolling over the debt may not prove difficult. Today, interest coverage is elevated as cash-rich
companies have been able to refinance at very low interest costs, moving from 4x to nearly 8x in the past five
years (Exhibit 18). This means the odds of many companies having difficulty making their debt
payments in the coming years is sharply lower than it has been in some time.
Furthermore, the US Economics team believes that when the Fed does begin to raise interest rates, the terminal
nominal federal funds rate will be 3.5%, and it will take several years to get there. This suggests that even in a
rising interest rate environment, companies will still face an historically low cost of financing.
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Exhibit 18: Interest Coverage Ratios Are High
So u rce: Th o mso n Reu ters, Mo rgan Stan ley Research
The Credit Cycle
As Exhibit 19 shows, the high-yield bull market in the 1990s was uncommonly long, but as the current cycle
continues (it has already surpassed the last cycle in duration), a 1990s repeat becomes more probable (see US
Credit Strategy: Where Are We in the Credit Cycle?, July 18, 2014). The credit timeline usually plays out in the
following way: 1) spreads trough at some point in the expansion phase, 2) the economy and earnings roll over,
leading to a spike in leverage, drop in debt coverage, and spike in spreads, 3) the new issue market shuts down
for lower-quality credit, and lastly, 4) defaults spike as companies can’t refinance, can’t make interest payments,
or can't restructure due to unsustainable leverage, covenant violations, and other headwinds.
The lag between 1) and 4) can be years (it was 4.5 years in the late 90s). While we aren't analyzing a statistically
significant number of cycles here, it does appear that we could be many years away from a credit downturn.
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Exhibit 19: Is This Credit Cycle a Repeat of the 1990s in Length?
So u rce: Th e Yield B o o k, Mo rgan Stan ley Research
Easier to Use History as a Guide
One interesting, but arguably more anecdotal reason that could make this cycle last longer is that it is far easier
to analyze data than any time in human history. The amount of data stored means lots of smart people can
analyze trends and anticipate factors associated with historical downturns.
In Exhibit 20, we map new data capacity sold in a given quarter since 2002. Enterprise data storage capacity has
grown dramatically since the early 2000s. While it's not a metric to monitor for cycle peaks, it is possible that
history is less likely to repeat itself as often as it did in the past, given how much data and analytics are possible
today.
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Exhibit 20: Global Enterprise Data Storage Has Grown Rapidly...
So u rce: IDC, Mo rgan Stan ley Research
Processing power has also risen sharply (Exhibit 21).
Exhibit 21: ...As Has Processing Power
So u rce: Co mp an y Data, Mo rgan Stan ley Research
We do think that technology has likely enabled some changes in human behavior - and the ability to analyze
and process data en masse might in and of itself help to lower volatility and extend economic expansions.
Demographic Shifts
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A quick note on demographics is in order because the headwinds from an aging population will not last forever.
The share of the US population aged over 65 has been an increasing drag on economic activity. This substantial
headwind was already a factor in slowing the economy's potential before the financial crisis, but has grown
steadily since (see Potential GDP and Its Implications, March 10, 2014).
As the years progress, however, the increasing share of the aging population slows, while the share of the prime
working-aged population increases (Exhibit 22). This shift does not begin in earnest until about 2020, but with
every passing year after that, the headwind from the aging population lessens.
Exhibit 22: Shifting Demographic Trends Slowly Turn from a Headwind to a Tailwind Around 2020
So u rce: Cen su s B u reau , Mo rgan Stan ley Research
MSRISK
The US Economics team recently introduced the Morgan Stanley Recession Risk Model, or MSRISK (see
Introducing the Morgan Stanley Recession Risk Model, July 15, 2014). Moments of tension in the economy
should be captured by rising volatility in MSRISK and tends to provide a 6-month lead-time to downturns in the
business cycle, while the level of the indicator should definitively call the cycle peak. In August, both level and
volatility of MSRISK continued to indicate a very low risk of recession (Exhibit 23).
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Exhibit 23: Very Low Risk of Recession Currently Indicated by MSRISK
So u rce: Mo rgan Stan ley Research . No te: Th e level o f MSRISK mu st p ass th e 95% co n fiden ce th resh o ld to sign al recessio n h as b egu n . Vo latility in th e
MSRISK mu st p ass 300% to p ro vide th e 6-mo n th lead-time fo r th e start o f recessio n .
Bottom Line
Business cycles don't die of old age, they die of overheating. Debt dynamics, particularly in the US, paint the
picture of a more prudent household sector and well-managed corporate sector, both of which remain far from
the heights of leverage typically associated with risks to business cycle expansions. Moreover, volatility in the
economy has trended lower over time, owing in part to technological advances that have helped companies
remain nimble when sudden changes in aggregate demand occur, and in part to a rising share of companies
that carry no inventory.
The current expansion is more than five years old, and with little evidence of global synchronicity, there are no
signs as yet that the global economy is overheating. The current US expansion has already lasted longer than
the average expansion in the post-WWII period, but the factors we monitor and have discussed here lead us to
conclude that it isn't unreasonable to expect that this expansion could be the longest on record. In a scenario
where the cycle does extend for several more years, earnings could grow modestly as well. The US Equity
Strategy team notes that EPS growth of 6% per year from 2015-2020 would drive S&P500 earnings to
near $170. A 17x multiple would translate into a peak level for the S&P500 near 3000 under this
scenario.
Of course, no one can predict unforeseen shocks to the economy - be it fiscal or monetary policy missteps
domestically, geopolitical events abroad, or even major natural disasters. But our title, “2020 Vision”, is our
tongue-in-cheek way to desribe the idea that the current US expansion could prove to be the longest
ever and perhaps last until 2020.
There are a number of ways the current expansion could get derailed. Europe and China are already slowing and
near recession in some parts. Japan is highly dependent on the success of policy. US reforms on key issues like
the budget, taxes and entitlements, and immigration seem a long way off and are likely to cause much angst in
the coming years. And after a prolonged period of unprecedented monetary policy accommodation, we are on
the cusp of removal of that accommodation - also in an unprecedented way. So by no means can we say that six
or seven more years of expansion are an obvious outcome. But, all else being equal, the metrics we analyzed in
this note are unlikely to be the root cause if this expansion were to be cut short.
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Additional Research
US Economics: Capex Outlook: Modest Is as Good as It Gets (July 23, 2014)
Cross-Asset Dispatches: Introducing Our Framework (August 5, 2014)
US Credit Strategy: Where Are We in the Credit Cycle? (July 18, 2014)
US Equity Strategy: What Do You Buy if You're Bullish? (August 11, 2014)
US Quant Research: Momentum: Hurry Up and Wait (August 25, 2014)
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Endnotes
1
(Reinhart, Carmen and Vincent, “After the Fall”, FRBKC Jackson Hole Symposium, August 2010.
2
“Slower” also implies the US business cycle could be more vulnerable to smaller shocks because
growth is not more robust. Think of it as a swimmer treading water, head bobbing precariously above
the surface. It doesn't take much for the swimmer to dip under and pop back up. A recent example of
this is the deeply negative quarter of growth in 1Q14 prompted by several factors, the largest of
which was an unusually severe winter. As we discuss below, one quarter of negative growth does not
meet the criteria needed to determine that a cycle peak has occurred.
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Important US Regulatory Disclosures on Subject Companies
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan
Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of
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Global Stock Ratings Distribution
(as of August 31, 2014)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our
ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.
Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see
definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond
Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
COVERAGE UNIVERSE
STOCK RATING CATEGORY
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
TOTAL
INVESTMENT BANKING CLIENTS (IBC)
COUNT
% OF TOTAL
COUNT
% OF TOTAL
IBC
% OF RATING
CATEGORY
1078
1378
108
566
34%
44%
3%
18%
334
413
21
93
39%
48%
2%
11%
31%
30%
19%
16%
3,130
861
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received
investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's
industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on
a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant
broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad
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US Equity Strategy and US Economics | September 2, 2014
market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad
market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
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US Equity Strategy and US Economics | September 2, 2014
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