An Odyssey Through Market History

**Andrew Sheets** (0:00)
Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, what can Odysseus teach us about investing? It's Friday, July 24th at 2 p.m. in London.
Like many of you, this week, I saw The Odyssey. The enduring appeal of this story, more than 2,700 years after it was composed, is a reminder that some themes are universal. Pride, resourcefulness, determination, self-control, or the lack thereof, mattered to both an ancient Greek dinner party and resonate with anybody investing today. But drawing lessons from the past is also tricky. We do not have that much financial history, and markets contain too many variables for the same combination to align twice. Some judgment, art, and dare we say storytelling is always involved in deciding which historical periods best describe the present.
Those disclaimers aside, we've argued in our Yearhead Outlook that 1997 to 1998, and 2005 to 2006 are some of the most useful templates for the current backdrop. That remains our view. They suggest a cycle that has further to run, equities outperforming credit, and a preference to own volatility. Both of these periods were defined by a sharp rise in corporate activity. That is certainly what we're seeing today. We forecast US capital expenditure to rise 23% in 2026 and 26% in 2027 AI is the biggest driver of this spending, but buildouts in energy infrastructure are also playing a role. An increased corporate capex is certainly a global story, especially in Asia.
Then there's M&A, which also rose significantly in these two past historical periods. As recently as early 2024, global M&A volumes were unusually depressed, some of the lowest levels in over 30 years adjusted for economic size. But that's no longer the case. And more recently, M&A is currently running up 64% relative to a year ago.
Important current macroeconomic data also looks somewhat similar to these past two periods. The current levels of US core PCE inflation, the unemployment rate, and the 10-year yield are pretty close to the averages seen in 1997, 1998, 2005, and 2006 And the US 210's yield curve, well, it broadly flattened then, and it has broadly been flattening today.
A third similarity, maybe less obvious but no less important, is deregulation. Both 1997 and 1998 and 2005 to 2006 saw significant financial deregulation, and we're seeing that again now. From the Basel Endgame to NIC risk weights to Solvency II changes to savings reforms in Europe, Korea, and elsewhere, the current trend appears to be on a firmly deregulatory path. Even more simply, 1997 and 1998 and 2005 to 2006 provide interesting narrative bookends to two ways that I often hear the current environment being described. The late 90s? Well, that was defined by rising excitement around a transformational new technology, then the Internet, and the prospect of a more productive future. Sound familiar? And the mid-2000s? Well, that was defined by a very unequal economy and rising consumer stress, but growth that was still supported by a seemingly inexhaustible investment demand from a rising market force. Then, that force was emerging markets. Today, it's AI. Again, somewhat familiar. If these periods serve as a guide, the cycle probably has further to run, and corporate aggression should favor equities over credit. But if we learn anything from the trials of Odysseus, the journey can throw up plenty of surprises along the way.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.

**SPEAKER_2** (4:12)
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