U.S. stocks would be much lower if it wasn't for 'excessive' government spending, Morgan Stanley's Mike Wilson says

By Joseph Adinolfi

U.S. stocks would be in much worse shape in 2023 if it wasn't for "excessive" fiscal policy from the government and explosive money-supply growth in recent years.

That's the latest take from Morgan Stanley's Mike Wilson, the bank's chief investment strategist who, as MarketWatch's Steve Goldstein pointed out earlier, seems to never miss an opportunity to recall how wrong his market calls have been this year.

In his latest note, Wilson told clients and the financial press that excessive government spending has helped prop up the U.S. economy and markets to a degree that Wilson and his team failed to anticipate.

"Part of the reason we've found ourselves offside this year is that the fiscal impulse returned with a vengeance and remained quite strong in 2023 -- something we didn't factor into our forecasts," Wilson said in the note.

In an accompanying chart, Wilson noted that fiscal spending looks particularly excessive when compared with the U.S. unemployment rate, which fell to 3.5% in July, according to data from the Department of Labor released on Friday.

To be sure, Wilson was one of a select few on Wall Street to correctly anticipating last year's inflation-driven selloff.

But heading into the New Year, he expected stocks would tumble to new lows during the first half of 2023.

And after hanging on to his bearish view for months in spite of a powerful rally in equities driven by the artificial intelligence craze and a surprisingly resilient U.S. economy, he's recently taken the opportunity to reflect on why he got it wrong, while acknowledging the possibility that the rally could continue.

See:Morgan Stanley's Mike Wilson admits 'we were wrong' about 2023 stock-market rally, but refuses to throw in the towel

See: Morgan Stanley's Mike Wilson is warming to the U.S. stock-market rally. Here's what would make him turn bullish

It's possible, even likely, that the government's excessive spending could continue, at least until it comes time to raise the debt ceiling again in 2025.

Fitch Ratings last week cited projections for ballooning budget deficits for helping to inspire its decision to strip the U.S. of its AAA credit rating.

"The main takeaway for the equity market this year is that fiscal policy has allowedthe economy to grow faster than forecast, giving rise to the consensus view that therisk of a recession has faded considerably. Furthermore, with the recent lifting of the debt ceiling until 2025, this aggressive fiscal spending could continue," Wilson said.

The biggest problem with spending so much during good economic times, however, is that it limits Congress's ability to act when another recession inevitably arrives.

That could create problems for corporate earnings and, by extension, stocks, down the road, Wilson said.

"If fiscal policy is showing such little constraint in good times, what happens to the deficit when the next recession arrives?"

U.S. stocks were trading higher early Monday after the S&P 500 SPX logged its fourth straight day in the red on Friday, capping off the worst week for stocks since March. The index was up 0.5% in recent trade near 4,500, while the Nasdaq Composite COMP was 0.2% lower at 13,881.

The Dow Jones Industrial Average DJIA, which has surged higher over the past month as traders have favored some of this year's market laggards, was up 300 points, or 0.9%, at 35,362.

-Joseph Adinolfi

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08-07-23 1133ET

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