Inside Wall Street: Bulls Optimistic Despite Disasters and Turmoil

In these volatile times when so many extraneous events -- the devastation in Japan, the unrest in the Arab world -- are causing edginess among investors, it's surprising that the capital markets aren't seized by more turbulent twists and turns. investors are truly worried, and unsurprisingly, they keep returning to the same skeptical refrain: How long could the stock market avoid a more serious disruption, a deeper pullback?

I will repeat what I wrote here on March 17, when the world seemed ready to fall apart: "This is no time to panic. It's a time for equanimity and a tempered analysis."

Thanks to several introspective, experienced market watchers, the global condition and forecasts of where the U.S. economy and the markets are headed are being laid out within a logical perspective. So what's an investor to do now? What's the update on the world economy and the stock market?

"The Japanese earthquake and tsunami, while a human tragedy, will not derail the global business or equity bull market," declared Jeff Applegate, chief investment officer at Morgan Stanley Smith Barney (MS). He and chief investment strategist David W. Darst wanted to convey in their latest Global Investment Committee report that the attractions of the world of investments haven't been diminished. They were clear and forthright about their continued bullish stance.

Despite the human tragedy in Japan and the ongoing turmoil in the Middle East and North Africa, the global economic recovery and the stock market's bull cycle, are intact, says Applegate. says Applegate.

Accordingly, he says, "we are overweight [in portfolio exposure] to equities, commodities, and REITS (real estate investment trusts), and underweight to cash and bonds." In global equities, "we continue to overweight emerging markets and commodity-sensitive Australian and Canadian markets."

Within the U.S. equities, "we have a tilt toward growth at the style level," and in global bonds, "we overweight corporate investment- grade and high-yield." However, we are underweighted in the developed-nations' sovereign and short-duration debt. And, finally, on inflation linked securities, "we are overweight" in those, says Applegate.
European Policies Head in the Wrong Direction

"While we extend our their deepest sympathies to those coping with the tragedies in Japan, we maintain our S&P 500 earnings per-share earnings estimates and price targets as S&P firms generate only 1% of aggregate sales from Japan," says Goldman strategist David J. Kostin.

Morgan Stanley's Applegate believes that U.S. monetary policy will likely remain highly stimulative, while European monetary policy may become tighter this spring -- a policy direction which he deems unwise. As a result, he expects U.S. GDP growth, which is currently expected to be above 3%, will be better than that of other developed economies, where growth is forecasts closer to 1%. On the other hand, Applegate notes that the growth rate in the emerging markets is expected to be triple that of the developed markets.

Morgan Stanley continues to expect subdued inflation in most of the developed nations. However, inflationary pressures in the emerging countries are likely to peak in the first half of 2011, they note.
Oil's Minor Volatility Is No Threat

With regard to the dollar, Applegate and his team of economists and strategists believes the currency's trade-weighted weakness is likely over.

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Longer term, "we believe the major developed nation's currencies will depreciate relative to emerging markets' currencies, such as the Chinese yuan, the Brazilian real, and the Indian rupee," predicts Applegate.

The global oil situation is also not too worrisome, in the eyes of Morgan Stanley's strategists. True, the unsettled conditions in Libya and elsewhere in the Middle East have led to heightened volatility in crude oil prices, ranging between $85 and $105 per barrel in the past month. "But as long as this political turmoil doesn't spread to the Middle East-North Africa's primary oil-producing nations, and thus cause a sharp spike in oil prices, this fairly range-bound oil-price volatility should not pose any threat to global business-cycle expansion or, by extension, the global equity bull cycle," says Applegate.

Indeed, in its calculations for this year and next, Morgan Stanley has assumed oil prices will average $100 to $105 per barrel. Those forecasts are largely based on demand forecasts from the emerging countries, which Morgan Stanley predicts will grow in excess of 65%, both in 2011 and 2012.
Stay the Course, and Buy Now

In sum, the outlook for the stock market and the U.S. economy remains bullish, according to the economists and market strategists at Morgan Stanley Smith Barney and Goldman Sachs.

"In our judgment, recent developments do not warrant a significant change in investment strategy," says Applegate. "So we reaffirm our tactical preference for global equities over global bonds and cash, as the time horizon for our tactical views is about 12 months."

Over at Goldman Sachs, Kostin and his team note that "we expect the Japan earthquake will have limited impact on U.S., growth." Still, he cautions that a "disruption of more than a few weeks in the supply of key components, such as auto parts or semiconductors, could have a more meaningful negative effect on U.S. output, although once again this would be temporary."

In all, there are a lot of reasons why the bull cycle should remain intact, and as I said last week, the downdrafts that have resulted from the recent calamitous events should provide buying opportunities for stout-hearted long-term investors.