Morgan Stanley stated that it is too soon to say that the bear market is over after seeing a drop in inflation, warning that companies will soon start to grapple with falling prices and higher wage costs, which would potentially weigh on profits.
“The rally in stocks has been powerful, and has many investors believing the bear market is over. However, we think it’s premature to sound the all-clear simply because inflation has peaked,” Morgan Stanley said.
“Just like most underestimated the positive effects of inflation on operating leverage, we think they are underestimating the negative effects from falling inflation,” the bank’s strategists added.
The latest jobs report that largely beat expectations proved that companies are still spending large amounts on labor, which would later weigh on operating costs as the prices they charge to customers begin to fall.
Last week, the U.S. added 528,000 jobs in July, bringing the labor market back to pre-pandemic levels. Since April 2020, the United States has added 22 million jobs. In July, the unemployment rate fell to 3.5%, a half-century low and the same as it was in February 2020 before the Covid-19 outbreak hit.
Positive US job data Friday strengthened the case for further Fed monetary tightening. Treasury yields and the dollar have risen as a result. It signaled that investors anticipate a recession as the Fed applies economic brakes.
