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Market returns are always a function of a tug of war between bullish and bearish influences but the sheer dichotomy of the most powerful current equity drivers make analysis and forecasting more difficult than usual. Thankfully, Morgan Stanley global strategist Andrew Sheets thinks more clarity is likely in the coming days.

Mr. Sheets sees the market as a standoff. There is, on one hand, significant weakness in leading indicators like U.S. PMI Manufacturing new orders, an inverted yield curve (the two-year bond yield minus the 10-year yield is below zero, suggesting a sharp slowdown in growth), and the Conference Board Leading Economic Indicators index. On the other, employment, retail sales and U.S. wage growth are strong relative to history.

To add to the confusion, the stronger economic data is not adding to growth expectations, at least at Morgan Stanley. Bond yields and rate hike expectations are climbing, particularly after Federal Reserve chairman Jerome Powell’s hawkish comments Tuesday, but Morgan Stanley economists predict anemic GDP growth of 0.4 per cent for 2023.

Mr. Sheets expects that two data points, U.S. non-farm payrolls on Friday and retail sales results on March 15, should indicate to investors whether to brace for an inflationary, faster growth market backdrop, or a slowdown and potential recession.

These disparate investing environments would require drastically different portfolio weightings. Commodity prices would benefit most from inflation while defensive, high-quality stocks have historically outperformed during slowdowns.

-- Scott Barlow, Globe and Mail market strategist

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