U.S. Policy Seen Offering ‘Pop & Gridlock’ for Markets This Year

(Bloomberg) -- The U.S. policy developments of 2018 may turn into the market headwinds of 2019 -- but not before a little near-term relief.

Trade-related market weakness and economic-data impact are now “clearly on display” in the U.S. and China, Morgan Stanley strategists and economists led by Michael Zezas wrote in a note Tuesday titled “Pop & Gridlock.” That makes a further escalation of the protectionist showdown unlikely, which should support assets in the near term.

The trouble is what follows.

“Another fiscal pulse is unlikely, and the downside of tax stimulus and trade uncertainty will weigh on growth,” Zezas and colleagues wrote. Overall, policy drag is likely to keep stocks range-bound over the course of the year, they reckon.

That’s consistent with the firm’s larger take on American stocks. U.S. equity strategist Mike Wilson has said that it’s too early to “blow the all-clear signal” for investment in stocks. Wilson’s 2,750 is one of the lower year-end estimates for the S&P 500 among strategists tracked by Bloomberg; the median is 2,980. The gauge closed Monday at 2,549.69.

Zezas remains skeptical that any progress can be made on a potentially stimulative infrastructure-spending package, and sees limits on legislative capacity amid an increased focus on investigative hearings on the administration from the Democratic-controlled House.

Health-care stocks are one area of concern, particularly later in the year, “when sentiment may swing based on health-care policy proposals from the Democratic presidential candidate field,” Zezas wrote.

That’s on top of the potential for drug pricing to become a bigger focus -- something Evercore ISI strategist Terry Haines called “the market sleeper issue of 2019” and a negative for pharmaceutical and biotechnology stocks, writing in a note on Monday.

Another bright spot for markets coping with U.S. policy is halfway around the world.

“In Asia, U.S./China trade policy is a more acute market variable, and an easing of trade tensions, coupled with China policy easing, may be sufficient for a more sustained rally in both equities and credit,” Zezas wrote.

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Todd White, Samuel Potter

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