Lisa Shalett is no permabull. She’s spent six months warning about the futility of fighting the Federal Reserve, and considers the rally that lifted stocks in January and February a head fake.
(Bloomberg) — Lisa Shalett is no permabull. She’s spent six months warning about the futility of fighting the Federal Reserve, and considers the rally that lifted stocks in January and February a head fake.
But chief investment officer of Morgan Stanley’s wealth management stops short of buying into the latest mega-bear-case on equities, namely that the collapse of three American banks is prelude to a crisis such as the one that laid global economies low in 2008.
In the eyes of the market veteran, the collapse of a few regional lenders was mostly driven by poor risk management at a time when the Fed is aggressively tightening monetary policy to slow the economy. While more banks are likely to fall, Shalett considers the threat to the broad financial industry and economy as contained.
“Remember, in the great financial crisis, there was a lot of this that was about cross-counterparty credit risk,” she told Bloomberg Television. “This is less about immediate contagion.”
Shalett urged the Fed and European Central Bank to stay engaged in their inflation-fighting battle. Otherwise, policy makers risk losing their credibility.
“I have worried about central banks being late to the party on this inflation challenge,” she said. “If central bank credibility has a chance of being preserved, I think that the Fed especially, and then secondarily the ECB, needs to continue on their tightening campaign.”
Global stocks resumed a selloff Wednesday as turmoil at European bank Credit Suisse Group AG added to angst among investors who are already on edge amid chaos in the US financial industry. Last week, Silicon Valley Bank became the biggest US bank failure in more than a decade after an unsuccessful attempt to raise capital and a cash exodus.
Two other lenders, including Silvergate Capital Corp. and Signature Bank, also failed, forcing regulators to step in and introduce a new backstop that Fed officials said was big enough to protect the entire nation’s deposits. Banks were already suffering from the jump in rates that eroded the value of their portfolios, while customers in the technology and crypto startup worlds were yanking cash.
The turmoil has prompted bond traders to scale back their expectations for Fed tightening. Now the market has priced in a drop of around 100 basis points in the central bank’s policy rate from its expected peak in May.
The Fed is expected to raise its benchmark interest rate by 25 basis points next week, according to the median economist estimate compiled by Bloomberg.
“They’ve got to stay the course, in my humble opinion. And I think to do anything else at this juncture at least would really be a misstep,” Shalett said. “Not doing so has much longer term structural damage to the economy in terms of inflation risk premiums, overall policy term premiums, and turns into higher for longer rates over long periods of time.”
–With assistance from Jonathan Ferro and Tom Keene.
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