Morgan Stanley (NYSE:MS) stock is up 16% in 2017, while the company’s revenues show no growth, which could be as bad for the market as it is for MS stock.
The gain is slightly better than the 15.3% in the S&P 500, while long-time rival Goldman Sachs Group Inc. (NYSE:GS) has gone nowhere.
There is a good reason for Morgan Stanley’s move. Margins are much higher than they were early in the decade, about 15% on average. In 2013 and 2014 these were below 10%. But the gains have been consistent since 2015, while the top line has stayed within a $50 million range since 2013.
It would seem the rising tide of the market is now lifting investment banking and Morgan Stanley stock. The price to earnings ratio for MS stock is now near 14, up substantially from a year ago, and analysts pounding the table for it (most say buy it) think things will get even better.
Trouble Free 2017
Investment banking rises and falls with the economic tides. When times are tough, the investment banks have trouble. When times are flush, they usually do very well.
Times are good now, especially at Morgan Stanley. They’re beating Goldman Sachs at the commodity game for the first time in years, one reason why that rival stock has been stuck in neutral.
While fintech is roiling the market for credit cards, loans and deposits, the complexity of what Morgan Stanley does resists automation, says CEO James Gorman.
But if times are so good why is Morgan Stanley tying down its talent, leaving a broker protocol with 1,700 signatories that let brokers take their client names with them when they left?
It all sounds like a bank that is battening down the hatches, fearful of the future. Don’t pay attention to those Bitcoin millionaires behind the curtain.
Trouble Ahead
One way Morgan makes money is by advising clients about other companies, telling them to buy Amazon.com Inc. (NASDAQ:AMZN) or sell General Motors Company (NYSE:GM). Changes in its ratings are often self-fulfilling prophecies.
But what about Morgan Stanley itself? The old brokerage game of “wealth management,” investing rich people’s money for them, is proving to be a gold mine, and could represent 10% of the bank’s revenue this year.
But Morgan Stanley itself is saying the bull market may be about to end. It sees too much leverage in the economy, too much exuberance among investors and a high likelihood that the Federal Reserve will raise interest rates.
Stocks will rise sharply until they don’t, they warn, sounding more like this journalist every day.
The Bottom Line for MS Stock
I personally see a different catalyst ending the bull run, namely the tax cut debate.
If it ends with a “loss” for the Trump Administration, stocks will fall because traders are expecting a win. If it ends with a “win,” stocks will fall because the bill takes money out of the things people invest in, and puts it into cash.
Cash that can’t find a return, cash that can’t be put to work, doesn’t grow. It tends to fall in value, both in comparison with other currencies and against inflation.
Already, Morgan Stanley notes, a flattening yield curve is making it harder for money to make money passively. What happens when you pile more money on top of that?
What happens is that, as in my case, money becomes unemployed. Money that is unemployed is no use to anyone. Even to Morgan Stanley. Markets that lock up on imbalances fall, destroying value. The company is already warning this may happen.
Take them at their word.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
