• The stock market's recent rotation from growth to value stocks portends more losses for investors who had crowded the fastest earnings growers, according to Morgan Stanley. 
• Michael Wilson, the firm's chief US equity strategiest, found that this was the biggest such rotation since the 2000 and 2008 recessions. He has reason to suspect that this episode portends another crisis.  
• Click here for more BI Prime stories.

The market's sudden shift away from the best-performing stocks has eerie similarities to moments of crisis. 

Beginning last week, investors fled stocks with the strongest earnings growth for those that were considered cheap.

Some strategists described it as merely a technical rotation because of the extent of crowding that was prevalent in growth stocks. But Michael Wilson, the chief US equity strategist of Morgan Stanley, suspects that it's a signal of more trouble ahead — and the beginning of a longer downtrend for growth stocks. 

His hunches are based on similar occurrences before the two most recent recessions. The chart below, which he published in a recent note to clients, shows that momentum stocks had similarly large breakdowns on a five-day basis.

"Perhaps the market is finally worried about an actual recession approaching, in which case the highest-quality stocks would finally be vulnerable," Wilson said.  

Read more: Traders are overlooking a warning sign that flashed before the last financial crisis. Here's why one market expert says that means another recession is 'imminent.'

He described the status quo before this rotation as a "Goldilocks" scenario. The favored end of the momentum trade was comprised of stocks that promised bond-like protection and the strongest earnings growth. Meanwhile, the short-momentum trade was in companies that were cyclical in nature. 

But with the breakdown of the momentum trade, investors are losing out on the best of both worlds — growth and quality. 

This might just be the initial step in a longer downward spiral for growth stocks, and where a possible recession comes into the picture, according to Wilson. 

S&P 500 earnings-per-share growth was flat for the first half of the year and Wilson says it's likely to turn negative in the third quarter. Earnings for small and mid-cap companies have slowed even more sharply this year.

A profits downturn could not only rein in Wall Street's forecasts for earnings growth, but imperil Main Street's contribution to the economy if companies respond by slowing hiring. The latter is a more material risk to an economy that has been upheld mainly by consumer spending.

"In our view, this is the single biggest risk to the economic expansion that is not discussed in the mainstream," Wilson said. 

His views— including calls for an earnings recession — have certainly run against the grain for several months. Given his more cautious outlook, he has also been recommending that investors underweight growth stocks and overweight defensive stocks.

The Invesco Defensive Equity exchange-traded fund includes companies that potentially have stronger risk-return profiles in times of market turmoil. 

"We continue to think secular growth stocks remain the most vulnerable part of the market and the recent breakdown in momentum suggests that risk is even greater today than it was at the last market high in July," Wilson said.

SEE ALSO: JPMorgan unveils 6 trades that should rake in profits regardless of whether the stock market tanks or rebounds in the near future

Join the conversation about this story »

NOW WATCH: How Area 51 became the center of alien conspiracy theories

• Earnings growth for small-cap companies has been negative for two straight quarters, and is expected to deteriorate again when companies report third-quarter numbers. 
• According to equity strategists at Morgan Stanley, this trend is the single-biggest risk to the economic expansion that is not discussed in mainstream circles. 
• This earnings recession also forms the basis of their bearish view on stocks.  
• Click here for more BI Prime stories.

The constant headlines surrounding the trade war with China have temporarily overshadowed another danger that's brewing on home soil. 

While geopolitics has been the clear driver of recent market action, the spotlight will swing back to corporate earnings growth over the next few weeks. 

Equity strategists at Morgan Stanley anticipate that third-quarter results will show a definitive slowdown in profit growth for the largest public companies.

But they expect the picture to be worse for smaller companies, which have already suffered two straight quarters of negative earnings growth. Earnings-per-share growth for the S&P 1000 index that combines mid- and small-cap firms is estimated to be -8% year-over-year in Q3. 

"In our view, this is the single biggest risk to the economic expansion that is not discussed in the mainstream," said Michael Wilson, the chief US equity strategist at Morgan Stanley, in a recent note to clients. 

"It's also the one area we have conviction about no matter what happens to trade — i.e., the earnings recession is here and it's likely to get worse before it gets better."

Small-cap stocks has significantly lagged large caps over the past year amid widespread concern that the trade war could sink the global economy. Smaller, more domestically oriented companies were within line of fire as investors shifted to bonds and other assets that are considered safer. 

Read more: MORGAN STANLEY: The stock market just shifted by a magnitude that usually precedes recessions. Here's why it's an ominous sign once again.

A prolonged earnings downturn could imperil Main Street's contribution to the economy if companies respond by slowing hiring. The latter is a the big risk to an economy that has been upheld mainly by consumer spending.

The earnings recession Wilson expects to grip small-caps is at the heart of his cautious view of the broader stock market. If multiple companies miss expectations and do not provide cheery guidance about the months ahead, investors could experience a rocky earnings season.

But Wall Street has been catching up to his view that all is not well in small-cap land. Earnings expectations for smaller companies relative to larger companies have been reined in this year, as the chart below shows. 

A significant de-escalation of the trade war could offer reprieve to investors. Absent of that, it will be difficult to avoid a recession in 2020, according to Wilson.

It appears that investors are already sniffing out this recession risk by fleeing the stocks most directly exposed to the US economy. 

But Wilson also reckons that a trade resolution may not be the golden key that it is made out to be. Another delay of tariffs may lead businesses to scale back their spending since they won't have the same urgency to beat a deadline. 

Given these risks, Wilson says it still pays investors to be defensively postured. The key question now is whether growth recovers or sinks deeper into a global and US recession. 

The risk of the latter scenario is higher, in his view.

SEE ALSO: GOLDMAN SACHS: These 20 beaten-down stocks are perfectly primed for a huge comeback — and you should buy them for cheap right now

Join the conversation about this story »

NOW WATCH: Here's what airlines legally owe you if you're bumped off a flight

• Airbnb is set to hire Morgan Stanley and Goldman Sachs as advisers for its planned stock-market flotation in 2020, Reuters reported Wednesday.
• The home-share company represents a major client and is poised to be among the biggest firms to go public next year, with a private valuation of $31 billion.
• The banks are likely to serve more as market advisers than offer underwriters, as a direct listing doesn't involve the sale of any new shares.
• The unconventional approach allows Airbnb to avoid the millions of dollars in bank fees commonly associated with IPOs.
• Visit the Business Insider homepage for more stories.

Airbnb is poised to hire Goldman Sachs and Morgan Stanley as join advisers for its planned stock-market flotation in 2020, people familiar with the plans told Reuters Wednesday.

The home-sharing company represents a high-profile client. But if it opts for a direct listing, as has been reported, the mandate will likely be less rewarding for the banks. While traditional IPOs can bring banks millions of dollars in underwriting fees, Airbnb's direct listing plan won't involve the sale of any new shares.

Morgan Stanley and Goldman Sachs would likely serve as market advisers, and not as an IPO underwriter, Reuters reported.

Airbnb is considering a move to public markets in the middle of 2020, timing that would avoid volatility from the US presidential election, one source said. The firm is privately valued at around $31 billion, suggesting it could be one of the largest companies to go public next year.

Direct listings have become increasingly common in the tech sector, with Spotify and Slack among the biggest names to chose the route over IPOs in recent years.

Read more: Morgan Stanley says WeWork's failed IPO marks the end of an era for unprofitable unicorns — and explains why it leaves the market's tech kingpins vulnerable

The company's move to public trading arrives after numerous tech IPO flops and delays throughout 2019. Unicorn companies — startups with $1 billion valuations — Uber, Lyft, and Peloton all plummeted after going public in 2019, wiping out hundreds of millions of dollars in investor wealth during their debuts.

WeWork pulled its IPO in late September after heightened scrutiny led to CEO Adam Neumann's stepping down. The co-working company saw its valuation plummet roughly 75% as analysts critiqued the firm's heavy spending and lofty ambitions.

Now read more markets coverage from Markets Insider and Business Insider:

Wall Street is starting to take the possibility of an Elizabeth Warren presidency seriously — and strategists warn a victory could crush certain parts of the market

The US will reportedly slap $7.5 billion worth of tariffs on European imports

Taboola and Outbrain, two of the biggest content recommendation companies, are combining to take on Google and Facebook in advertising

Join the conversation about this story »

NOW WATCH: Here's what airlines legally owe you if you're bumped off a flight

• Snap traded as much as 5.9% higher early Friday after Morgan Stanley upgraded the company and praised three elements of its business.
• The Snapchat-parent's improved ad revenue, operating efficiencies, and profitability outlook prompted the bank's analysts to bump their price target to $17 per share from $14 and upgrade the stock to "equal-weight" from "underweight."
• Continued investment in partnerships, original content and daily active user growth would make the firm more positive on Snap stock, the analysts' note said.
• Watch Snap trade live here.

Snap Inc. traded as much as 5.9% higher early Friday after Morgan Stanley upgraded the Snapchat-parent and praised three key elements of its business.

The Snapchat-parent's improved ad revenue growth, cost efficiencies, and profitability prompted a stock upgrade, Morgan Stanley analysts wrote in the Friday note. 

"At a high level, we have underestimated Snap's stronger top and bottom-line execution and ability to drive growth and upward revisions," the analysts wrote.

The team of analysts led by Brian Nowak upgraded the stock to "equal-weight" from "underweight," and bumped their price target to $17 per share from $14.

Read more: 'It's become table stakes': Some media buyers say Snapchat is becoming a mainstay for clients, with some increasing ad spending as much as 40%

A collection of new products have allowed advertisers to better optimize spending on Snapchat, the note said. There's "room for higher monetization" in North America as per-user ad revenue remains relatively low compared to Snap's peers, according to the analysts.

Paired with improved operating efficiencies, the revenue boost should send Snap's margins higher through the next few years, the analysts said. The company is "executing at a materially higher level from a revenue and [operating expenses] perspective," they added.

Morgan Stanley noted that growth in daily active users and "on-platform innovation" are necessary for an "overweight" rating upgrade. Continued investment in original content and partnerships would also increase positive sentiment toward Snap stock, the note said.

Snap traded at $14.47 as of 11:25 a.m. Friday, up roughly 163% year-to-date. 

The company has 11 "buy" ratings, 25 "hold" ratings, and three "sell" ratings from analysts, with a consensus price target of $17.33, according to Bloomberg data.

Now read more markets coverage from Markets Insider and Business Insider:

A flood of new data from the US and eurozone suggests recession risks are flashing red. Here's a full rundown of the wreckage.

'Wow America': Trump questions how he can be impeached with US unemployment at a 50-year low

Read the memo Refinery29 leaders sent to staff about Vice Media buying the company

Join the conversation about this story »

NOW WATCH: What El Chapo is really like, according to the wife of one his closest henchman

• Andrew Sheets, the chief cross-asset strategist at Morgan Stanley, relies on three time-tested leading indicators to forecast stock and bond returns.
• He employs the US ISM Manufacturing Purchasing Managers Index (PMI), the Conference Board's US Consumer Confidence Index, and initial jobless claims to gauge the health of the markets and anticipate where trends are headed.
• Out of the three: one looks bad, one looks troubling, and one looks okay. 
• Click here for more BI Prime stories.

It's been said that the reason why Wayne Gretzky was such an elite hockey player was because he had the foresight to skate to where the puck was going, and not to where the puck had been.

That same notion holds true in investing.

Market participants often fall prey to lagging indicators, as they rely heavily on information that may no longer be indicative of where things are headed. And although metrics like the consumer price index, gross domestic product, and the trade balance are useful, they provide a clear picture of the past without much insight to what the future holds.

That's why Andrew Sheets, the chief cross-asset strategist at Morgan Stanley, thinks investors need to shift their focus onto three different indicators — ones that can anticipate trouble well before it's reflected in pricing.

The three indicators that top Sheets' watchlist are: the US ISM Manufacturing Purchasing Managers index (PMI), the Conference Board's US Consumer Confidence Index, and initial jobless claims. And after the latest data releases, Sheets' skepticism on the bull market's longevity is increasing at a rapid pace.

"One of them currently looks bad. One is worrying. And one still looks fine but bears watching," he said in a recent client note. "They are key barometers for many of our most sophisticated asset allocation clients."

Here's a deeper, individual look at the measures Sheets is paying most attention to.

US ISM Manufacturing Purchasing Managers index (PMI)

"Because the Institute for Supply Management has been running it since 1948, the PMI provides a uniquely consistent, long-term measure of US industrial health, and plenty of data to help to gauge forward-looking implications," he said. "And at the moment, those implications are troubling."

It's no secret that investors have been fretting over the health of PMI readings. In September, the metric dropped to 47.8 — its lowest level since June of 2009. For reference, a reading below 50 indicates a contraction.

In order to smooth out any outliers, Sheets' employs a six-month moving average to the readings — but that's not helping him sleep any better. It's currently below average, and continuing to fall.

The Conference Board's US Consumer Confidence Index

Right now, consumer confidence is riding high in the US. But Sheets thinks that investors adhering to this metric as a sign of strength are misinterpreting it.

"Markets peak when optimism peaks, and market and consumer optimism can frequently peak together," he said. "US consumer confidence made major tops in 1988, 2000 and 2007, all periods that were followed by decidedly worse-than-average equity and credit market returns."

Consumer spending makes up about 70% of the US economy, so it's important to know how consumer confidence is trending. A breakdown in confidence will often precede a slowdown in spending — and a sharp slowdown in spending portends an economic contraction.

As a result of these optimistic readings, Sheets thinks consumer confidence may be nearing an inflection point with dangerous implications.

Initial Jobless Claims

If there's a silver lining to any of this, it's initial jobless claims. The measure has held up nicely despite recent hiccups in nonfarm payrolls data.

To Sheets, an upturn in claims could spell the beginning of the end.

"This number reflects the health of the labour market, but importantly tends to move earlier than the official unemployment rate, making it a potentially more useful indicator for stock markets that are also trying to look ahead and anticipate," he said.

The chart below depicts the slow and steady decline in the number of jobless claims from 2009's peak. 

With all of that under consideration, Sheets' remains skeptical on the market's future.

"All three are components of our US cycle indicator, and their readings are one of several reasons why we remain cautious on the market," he said. 

He added, "Why does that matter? Short-term investors can help the market to rally over a given day or week. But the troubling signs from key long-cycle data, in our view, have made it harder for asset allocators to make a major positive shift in their exposure. This may be one reason why global equities are repeatedly failing to break out higher."

SEE ALSO: A Wall Street investment chief says stock market levels are 'completely unjustified' — and shares how he's positioning his portfolio in an economy that looks 'primed for recession'

Join the conversation about this story »

NOW WATCH: What El Chapo is really like, according to the wife of one his closest henchman

• Morgan Stanley Wealth Management is planning a new digital feature for its force of 15,000-plus financial advisers designed to better help them spot risks in clients' portfolios in an immediate way. 
• The tool, which the firm wants to roll out in 2020, will consider news headlines and other information to help advisers quickly gauge portfolio risk.
• Chris Scott-Hansen, managing director and head of portfolio and trading solutions, spoke with Business Insider about these plans. 
• Visit BI Prime for more stories.

Morgan Stanley Wealth Management is developing a new tool for its 15,000-plus financial advisers that will help them wade through news and other information and frame it in terms of client portfolio risks and opportunities. 

Morgan Stanley, among the largest US wealth managers, is working to deploy a new feature that would act as a "cheat sheet," according to Chris Scott-Hansen, managing director and head of portfolio and trading solutions at the bank.

It would help advisers summarize data, including news headlines, that's relevant to their clients' holdings, and would be housed on a dashboard that all the firm's financial advisers already have access to.

"You come in in the morning for your cup of coffee and you know exactly — no matter how many clients, or how many strategies, or how many positions in your book — here's what you need to know today," Scott-Hansen said in an interview this week with Business Insider at the firm's New York headquarters. 

The goal of the tool is to help advisers quickly gauge portfolio risk and not be caught "off-guard," he said. 

Read more: Tech is now essential in the battle to recruit and keep wealth talent. Deutsche Bank and Morgan Stanley execs gave us their pitch.

Morgan Stanley plans to call its new feature "Business Insights," Scott-Hansen said. Advisers already have access to various news services, he said, along with alerts from the firm's research group. 

Scott-Hansen's plan for these "quick insights" underscores a broader trend in the wealth management industry. Big wirehouses are under pressure to upgrade legacy technology, particularly as new, low-cost roboadvisers up the game for what can be expected on the client-facing side from self-serve options.

In-house tech tools are also a key focus for the advisers themselves — in August, we talked to Paul Vienick, head of digital client platforms at Morgan Stanley Wealth Management, who said that one of the first questions from prospective advisers is usually: "What is your technology like?"

But in general, banks also need to balance tech upgrades with managing overall costs.

The new feature's first elements will roll out during 2020. The wirehouse will also unveil new, client-facing, elements beyond the current reporting capabilities next year. Morgan Stanley did not detail what those changes would be. 

Morgan Stanley — which at the end of June had 15,633 advisers overseeing some $2.5 trillion in client assets — partners with the asset manager BlackRock and its Aladdin investment management technology to power Morgan Stanley's risk analytics.

Aladdin — short for Asset Liability and Debt and Derivative Investment Network — is software that BlackRock sells to investment managers to help them assess risks around client portfolios. Meanwhile, BlackRock's Aladdin Wealth gives wealth management firms a client-level risk perspective.

BlackRock has seen wealth managers as an important pool of Aladdin users, and has been signing big managers around the world up to the wealth version of the platform. Wealth manager and investment bank UBS,  HSBC, and others have also partnered with BlackRock on its Aladdin wealth technology.

Morgan Stanley went live to with a new adviser platform for client portfolios in late 2018. Its capabilities include allowing the advisers to do things like run stress tests against client holdings and analyze various aspects like country and factor exposures. 

Read more:UBS Americas private-wealth head says he thinks losing a 'few hundred' advisers would not be a bad thing, and is looking at how robos can help keep the bank's richest clients

"Our risk analytics technology is now fully integrated into the adviser platform, allowing our advisers to provide real-time risk analytics in a way that no other provider can," Morgan Stanley chief financial officer Jonathan Pruzan said at an industry conference in New York last month, adding the firm has found it's acquired more client assets this way.

The tech gives advisers oversight into brokerage accounts, and helps flag potential risks for those clients, potentially building a case for transitioning into financial advice. Another aspect that can help drive business is the platform's ability to display all client assets, including what's held away from the bank.

The firm has also been adding to other ways to digitize adviser-client interactions. In late July, Morgan Stanley launched a digital document sharing tool for wealth management in partnership with cloud software company Box. 

Offering the best technology is now "table stakes" for holding onto assets and advisers alike, industry recruiters and executives have told Business Insider. 

And while many argue that there will be no full tech replacement for human advice and judgement, particularly when it comes to meeting the complex needs of the ultra-wealthy, the head of private banking at UBS told us in August that he's looking for ways for digital offerings to "do more" when it comes to the bank's richest clients. 

Read more:Morgan Stanley's wealth management arm is now the most profitable it's ever been. Wall Street is already questioning how long that can last.

Join the conversation about this story »

NOW WATCH: Super-Earths are real and they could be an even better place to live than Earth

• Arabian oil giant, Saudi Aramco is reportedly shelling out hundreds of millions to advisors for its upcoming IPO. 
• Bloomberg, citing sources familiar with the situation, said that Aramco was paying up to between $350 million to $450 million in fees to advisors from more than 20 different banks. 
• Bloomberg added that JPMorgan and Morgan Stanley were expected to be paid the most. 
• View Markets Insider's homepage for more stories.

Saudi Aramco, the Middle Eastern oil-giant, is currently preparing for a jaw-dropping IPO and the firm is paying hundreds of millions in fees to advisors as it readies to go public. 

That's according to Bloomberg, which, citing sources familiar with the situation, said that the firm is paying between $350 million to $450 million in fees to IPO advisors from over 20 different banks.

That payment according to Bloomberg would be around 1% of the $40 billion Aramco is looking to raise.

The sources added that Morgan Stanley and JPMorgan stand to benefit the most from the IPO advice fees. Goldman Sachs, HSBC, and Credit Suisse Group, as well as 15 book runners and three advisers, will also win from the listing, Bloomberg said.

Last week it was reported that Saudi Aramco was plowing forward with its IPO plans and could list 1% to 2%  of its shares publicly as soon as next month. Aramco is also due to release a prospectus in Arabic on October 25, with an English follow up on the 27th.

After the attacks last month on two of Aramco's oil facilities, some speculated that the IPO could be delayed until the company comes back to full capacity. However, Amin Nasser, the CEO said that oil production would be at full capacity by the end of November. 

Aramco officials in the past have valued the oil-giant at $2 trillion in the past, and the $40 billion figure would make it the largest IPO ever. Alibaba who current holds the record for the largest IPO paid roughly $300 million in advisor fees, according to Bloomberg. 

Bloomberg's sources added that the firm's board is due to meet with advisors this week, to approve the final share sale, likely on Thursday.

A representative for Aramco declined to comment to Bloomberg. 

Join the conversation about this story »

NOW WATCH: Nxivm leader Keith Raniere has been convicted. Here's what happened inside his sex-slave ring that recruited actresses and two billionaire heiresses.

• Morgan Stanley released its Q3 earnings on Thursday and it beat expectations. 
• The bank surged 4% in premarket trading.
• CEO James Gorman said that the bank remains "committed to controlling our expenses and are well positioned to pursue our growth initiatives."
• View Markets Insider's homepage for more stories

Morgan Stanley smashed expectations on Thursday after releasing its earnings for the third quarter. 

The bank in a statement highlighted increased revenues, which it said was its highest third-quarter earnings in the last decade. The bank added that Wealth Management delivered a pre-tax margin of 28.4%, as well as Investment Management revenues growing 17%. 

Sales and Trading net revenues also increased by 10% from a year ago to $3.5 billion.

CEO James Gorman said that "We delivered strong quarterly earnings despite the typical summer slowdown and volatile markets."

He added, "Firmwide revenues were over $10 billion for the third consecutive quarter, and we produced an ROE within our target range. Our consistent performance shows the stability of our business model. We remain committed to controlling our expenses and are well positioned to pursue our growth initiatives."

Here's a look at the key numbers:

• Net Income: $2.1 billion against the $1.85 billion expected. 
• Earnings per share: $1.27 per share against the $1.1 per share expected.
• Revenue: $10 billion against the $9.6 billion estimate.
• Return on equity: 11.2%.

Join the conversation about this story »

NOW WATCH: Nxivm leader Keith Raniere has been convicted. Here's what happened inside his sex-slave ring that recruited actresses and two billionaire heiresses.

• Morgan Stanley's chief financial officer said on Thursday that the firm's newly acquired Solium Capital — now known as Shareworks by Morgan Stanley — has won 265 corporate clients since the deal closed in May. 
• Shareworks runs a platform for tracking a host of companies' employees' stock awards and options — typically enjoyed by many startup employees who may eventually become full-fledged wealth-management clients of Morgan Stanley financial advisers.
• The Solium deal gives Morgan Stanley greater access to a younger client base, its chief financial officer said. 
• Visit BI Prime for more stories.

Morgan Stanley's largest acquisition since the financial crisis, and a big bet on a younger generation, is drawing in new clients, an indication the firm is continuing to double down on its boring yet steady wealth-management business. 

The firm's chief financial officer, Jonathan Pruzan, said on Thursday that the firm's newly acquired Solium Capital — now known as Shareworks by Morgan Stanley — has won 265 corporate clients since the $900 million deal closed in May.

"In terms of the economics and how we think about this business, it was really to get access to a younger and different client base," he added. "It's a direct channel." 

Shareworks runs a platform for tracking a host of companies' employees' stock awards and options — typically enjoyed by many startup employees who may eventually become full-fledged wealth-management clients of Morgan Stanley financial advisers. Solium has more than 3,000 stock-plan clients, with 1 million participants, including fast-growing companies like Instacart, Shopify, and Stripe.

Read more: Morgan Stanley just made its biggest bet since the financial crisis in a bid to win the hearts and minds of unicorn startup employees

The growth comes as competition ratchets up across the wealth-management spectrum. Legacy wealth managers like Morgan Stanley and its rival UBS, along with newer — and dirt-cheap — digital entrants, are vying for younger customers' dollars as analysts expect a massive wealth transfer in the coming years.

"We're going to start using our digital tools, our virtual advisers, to provide service for those clients, and they'll be priced competitively," Pruzan said. "And we still think the economics of that channel and getting into that business is a very attractive one for us." 

The Shareworks deal was also a play for assets that clients hold away from the firm that Morgan Stanley's financial advisers hope to instead oversee. Shareworks employees have $1.5 trillion of assets in other accounts. 

Read more: Morgan Stanley wants to roll out a feature for financial advisers to help instantly analyze news and data about portfolio holdings

The firm's wealth-management business reported $2.6 trillion in clients assets, a 3% rise from a year ago, and a 1% dip in annualized revenue per representative. Pretax income of $1.2 billion rose 4% from a year ago.

The unit's adviser head count dropped by 102 people compared with the same time last year. Total representatives fell to 15,553 from 15,655 one year ago.

Join the conversation about this story »

NOW WATCH: How Area 51 became the center of alien conspiracy theories

• SpaceX wants to surround Earth with a vast network of internet-providing satellites called Starlink.
• Financial analysts at Morgan Stanley Research estimated the project could grow SpaceX's base valuation to $52 billion, possibly up to $120 billion.
• However, SpaceX has asked to nearly triple its maximum Starlink network from 12,000 to 42,000 satellites, which would incur a major investment.
• A new Morgan Stanley estimate suggests the 30,000 extra satellites may cost SpaceX $60 billion, but the report doesn't even mention the rocket company's planned low-cost rocket system, called Starship.
• If projections from SpaceX founder and CEO Elon Musk pan out, the cost to launch Starlink might be half the new independent capital cost estimate.
• Visit Business Insider's homepage for more stories.

It's tricky business estimating the value of SpaceX, the fast-moving rocket company founded by entrepreneur Elon Musk in 2002. The same goes for the capital costs of its ambitious projects, like Starlink: a plan to bathe Earth in high-speed internet access using a fleet of thousands of satellites.

Despite the challenges, Morgan Stanley Research took an earnest whack at SpaceX's valuation in mid-September with an eye toward the inception of Starlink.

If the new project claims just a few percent of the global telecommunications industry and earns $30 to $50 billion a year, as Musk has said it might, the analysts figured SpaceX could grow to a $52 billion company. Or maybe anywhere between $5 billion and $120 billion, depending on the degree of its failure or success with Starlink.

Key to that estimate, though, is the cost to build and launch Starlink satellites. As Space News reported this week, SpaceX has changed plans: The company aims to nearly triple its maximum of about 12,000 satellites to 42,000 spacecraft.

This threw a wrench into the valuation calculus, so Morgan Stanley Research on Friday emailed reporters a short update that attempts to reckon the cost of 30,000 additional Starlink satellites.

Read more: SpaceX wants to launch 5 times more spacecraft over the next decade than have ever flown in human history

Analysts now figure the capital cost associated with this change could swell to $60 billion— and that's not including the price tag of launching the other 12,000 satellites. The figure also ignores the cost to replace all Starlink satellites every five years (something Musk told Business Insider in May during a call with reporters). Swapping satellites may add as much as $12 billion per year in capital investments, Morgan Stanley Research said.

This makes the cash cow that Starlink is supposed to be look considerably less attractive, given its hefty and ongoing projected price tag.

But this analysis assumes SpaceX would use its existing and partly reusable Falcon 9 rocket system to launch all Starlink satellites. It merely glosses over and doesn't even name a coming and radical variable change: Starship, which is the company' planned 387-foot-tall mega-rocket.

Financial analysts like to hedge their bets using as many reliable, real-world factors as possible. So it's understandable they'd skip over Starship — the system may not exist for years, or at all if can't escape the development phase.

Still, the potential cost savings with Starship are well worth considering. 

'We'd certainly like to transition to Starship'

If Starship comes to pass as Musk has envisioned it over the years, the two-part steel launch system would be fully reusable and capable of launching several times a day. That is in stark contrast to current rockets, which can take months or years to prepare for launch and only get used once, trashing untold millions' worth of hardware per flight.

Starship may upend the traditional launch industry by not having to be replaced every launch. It'd only cost SpaceX fuel, launch support staffing, minor refurbishment, and other fairly negligible needs to lift off.

Read more: A stirring new SpaceX animation of Starship launching shows how the rocket company plans to turn Texas into Earth's interplanetary transport hub

Morgan Stanley Research assumes Starlink would get off the ground 60 satellites at a time, as SpaceX demonstrated in May, at a cost of about $50 million per Falcon 9 launch. The estimate also assumes each Starlink satellite's cost is about $1 million, or on par with the satellites of competitor OneWeb.

By this math, the satellites cost about $30 billion and the launch costs amount to about $25 billion (another $5 billion is likely tied to ground support).

While the update does invoke Starship, it does so obliquely and without naming it — only noting its projected cost per launch.

"This [estimate] also does not assume cost improvements to build & launch satellites, with SpaceX targeting to reduce launch costs further, to ~$5M," the document states.

If Starship costs $5 million to launch, which jibes with what Musk has recently said, that's about 10 times less than a Falcon 9 launch. Asuming ground costs remain the saim, the cost to fly 30,000 satellites at 60 satellites per launch shrinks from $60 billion to around $37.5 billion — a difference of $22.5 billion.

"Starship isn't required for this system, but we'd certainly like to transition to Starship," Musk previously told Business Insider. "Starship, which would be a fully reusable system, and with much lower propellant costs and at a much larger scale, would dramatically improve launch costs, probably by a factor of 10 or something like that." 

But that's a per-rocket-launch cost comparison. It's equally important to consider how many more Starlink satellites Starship might be able to ferry into space at once.

Starship could launch more satellites for a fraction of the cost

Each of SpaceX's 60 satellites launched in May weighed about 500 pounds (227 kilograms), making their total mass about 30,000 pounds (13,620 kilograms) minus any deployment mechanism. According to a new website for Starship, the vehicle could heave about 220,000 pounds (99,800 kilograms) into orbit at once, or more than seven times the first Starlink payload.

Assuming SpaceX scales up the number of Starlink satellites accordingly — and they all fit inside the nosecone of Starship — perhaps as many as 300 or 400 could launch at once. This would cut launch costs for Starlink by additional billions. (This may not be the plan, though, since Starlink satellites would be deployed to many different orbits, or planes, around Earth to ensure proper internet coverage.)

The per-satellite cost estimate may also be lower than $1 million, too. Musk said in May that "the cost of launch per satellite is already more than the cost of the satellite," hinting mass-manufacturing costs are projected be in the realm of hundreds of thousands of dollars per satellite (not $1 million).

In any case, SpaceX is eager to have Starship — which Musk recently said could start flying within one or two years— start launching and deploying Starlink satellites.

"It's a heck of a lot of launches. We'll hopefully have Starship active if we're anywhere near 12,000 satellites," Musk said in May. "For the system to be economically viable, it's really on the order of 1,000 satellites. If we're putting a lot more satellites than that in orbit, that's actually a very good thing, it means there's a lot of demand for the system."

SpaceX did not acknowledge several requests for information and comment from Business Insider.

Correction: A previous version of this story did not account for the estimated cost of satellites. We regret the error and its comical irony.

SEE ALSO: Inside the 'awkward,' 'tense,' and 'heated' private meeting between Elon Musk and Texans whom SpaceX is trying to buy out to fully realize its vision to reach Mars

DON'T MISS: 45 unreal photos and renderings show how companies are building a space glamping industry for the superrich

Join the conversation about this story »

NOW WATCH: Watch Elon Musk unveil his latest plan for conquering Mars

• The outperformance of US stocks over their international counterparts that's been in place since the financial crisis is at an "inflection point," according to Morgan Stanley Wealth Management. 
• The firm demonstrated that a rotation was already underway in Europe and laid out more reasons why international stocks could deliver a huge payout to US investors for several years to come. 
• Click here for more BI Prime stories. 

In the 10 years since the financial crisis, non-US stocks have beaten their US counterparts only twice: in 2012 and 2017.

But the next 10 years are poised to look a lot different, according to Morgan Stanley Wealth Management.

The firm's call is that US investors will enjoy benefits from international stocks that go beyond the standard advantages of having a diversified portfolio: A meaningful rotation is underway and could lift the returns from non-US stocks above the US's for the next decade.

To compare how both trends have fared since the crisis, Morgan Stanley pit the S&P 500 against the MSCI All Country World Index ex USA. The former has delivered an excess of 500 basis points over the latter, on average, over the past 10 years. 

But this is about to reverse, resembling the period between 1999 and 2009, when international stocks outperformed the US in all but two years.

"We see the relative outperformance of the S&P 500 versus the MSCI ACW ex US as reaching an inflection point," Lisa Shalett, the chief investment strategist at Morgan Stanley Wealth Management, said in a recent note to clients.

The inflection is already in its early stages relative to European stocks. Shalett reached this conclusion by comparing the euro-denominated MSCI Europe Total Return Index with the dollar-based S&P 500 Total Return Index.

The chart below shows the European index has topped the S&P 500 for the better part of the past 12 months. 

This outperformance has taken place even as large investors have trimmed their exposure to Europe. 

Hedge funds' net exposure to the region is close to an all-time low, and European equity funds have seen their longest period of outflows in history, Shalett said, citing data from Morgan Stanley Prime Brokerage. 

However, she views this light positioning among hedge funds as a bullish signal for when the funds come pouring in again.

She further provided her rationale for why investors would consider rotating back into Europe.

Global stocks have long discounted a recession

Her broad assessment is that global stocks were discounting a recession long before fears of a US slowdown reached fever pitch this year because of the trade war and yield-curve inversion. 

Investors started getting jittery about global growth in early 2018, when all the major economies stopped growing in a synchronized fashion. The US soldiered on thanks to corporate tax cuts. But many other countries did not, as the first wave of US tariffs on China slammed those that relied on trade with the second-largest economy.

Another highlight of 2018 was the Federal Reserve's four rate hikes, which strengthened the dollar and hurt non-US stocks throughout the year. It wasn't until the fourth quarter of 2018 that US stocks buckled under the strain of Fed tightening.

Fast forward to late 2019, and non-US stocks have discounted much of the recession risks that US stocks are just now grappling with, according to Shalett.

The implication is that if global growth rebounds from here — spurred by more dovish central banks — investors stand to benefit from the rebound in non-US stocks that had sold off on recession fears. 

"The pay-off from this type of positioning could be large as non-US markets are inherently more cyclical in their composition and thus more operationally leveraged to improvements in global growth," Shalett said. 

In order to profit from such a rotation, Shalett recommends looking for active international fund managers who invest in value stocks and do not hedge the dollar. The currency component is important because any weakening in the dollar from here would increase the returns for US investors.

She also advises that investors watch the policy news flow for progress on the trade front and Brexit. After all, these are among the big issues that have hurt non-US markets lately — and their resolutions could also lead to huge payouts. 

SEE ALSO: Nobel laureate Robert Shiller wrote the textbook on the 2 worst bubbles in recent history. Now he tells us his best advice for avoiding the next big one.

Join the conversation about this story »

NOW WATCH: The Navy has its own Area 51 and it's right in the middle of the Bahamas

• Megan Holston-Alexander is a senior associate at Unusual Ventures, an early-stage venture capital firm started by former AppDynamics founder Jyoti Bansal and former Lightspeed general partner John Vrionis.
• Holston-Alexander, one of Business Insider's rising stars in venture capital, is leading many of the firm's diversity initiatives through its Academy program and its limited partner base because, as she told Business Insider, she doesn't trust "any old body" to recruit diverse candidates to technical or entrepreneurial roles in Silicon Valley.
• Although there's been progress among venture firms focusing on funding diverse founders, a recent study from Morgan Stanley found only 40% of surveyed venture firms are prioritizing investments in women and multicultural founders. 
• Holston-Alexander estimated that there will not be a significant change in the number of black venture capitalists with check-writing abilities in the next five years, something she says is crucial to funding underrepresented founders and making Silicon Valley more equitable.
• Click here for more BI Prime stories.

Turns out, venture capital's foray into diversity is mostly talk.

According to a study from Morgan Stanley released on Wednesday, 83% of surveyed venture firms believe they are intentionally investing in underrepresented founders. But that changes when asked whether or not it worked in practice — only 40% of the nearly 200 US firms said doing so was a firmwide priority. Add in findings from another study out of Stanford that black-led firms are rated less favorable than white-led firms, and it's not a stretch to understand how this vicious cycle perpetuates. 

"The mandate has to come from the top. So somebody has to say, at the top, this is important and it is something that I am allowing you to spend time on that I think is valuable," Unusual Ventures senior associate Megan Holston-Alexander told Business Insider.

Holston-Alexander is determined to make a dent in the less-than-inspiring statistics. As a junior employee at the relatively young VC firm, started by former AppDynamics founder Jyoti Bansal and former Lightspeed general partner John Vrionis, she was uniquely positioned to create programs and initiatives early on, something decades-old firms have struggled to implement. In a semi-official capacity, Holston-Alexander has taken charge of the firm's diversity programs through its Academy program and its referral process in partnership with a handful of limited partners.

"If I can help create Unusual as a firm that is open and willing to support a different type of entrepreneur, then I think that will make us a better firm and I think the partners at our firm believe that, the other associates believe that," Holston-Alexander said. "We take this kind of moral responsibility very seriously."

Holston-Alexander said a big part of her work comes from Unusual's LP base, which includes Historically Black Colleges and Universities, or HBCUs. She has helped the firm create an internship program with different HBCUs for both technical and finance students, both of which are overlooked by similar programs at other venture firms. The Alabama native also works closely with All Raise, a Bay Area nonprofit that seeks to end the funding gap for women and minority founders, by donating her free time to help connect founders with funders.

Bucking a self-fulfilling prophecy

Part of the problem, she said, is that Silicon Valley's legacy institutions, like other venture firms, are run by leadership that trends older, whiter, and more male than the general population. Partnered with the network-based model in which venture capital operates, entrepreneurs and technically talented candidates are overlooked. The solution, she suggests, isn't just to bring those candidates forward into more visible roles, but also to actively seek those individuals from outside traditional networks.

"Somebody else could do that, but I don't know that I trust just any old body to do it," Holston-Alexander said. "It's important to me that we nurture those relationships in a positive way. It takes a certain amount of empathy and understanding because you don't want to go in and be like, 'Oh hello black college, we want to come save your students and give them opportunities.'"

This is the so-called pipeline problem many industry veterans point to. But Holston-Alexander thinks that that problem is more of a self-fulfilling prophecy. Without women and minority investors, she said that underrepresented founders have a harder time getting venture funding. The data backs her up. 

"I think people are talking about it but I do not think in the next five years there will be a meaningful change in the number of people of color who have the power to write a check at venture capital firms," Holston-Alexander said.

SEE ALSO: Jack Dorsey’s former chief of staff and the woman behind Y Combinator’s legendary Demo Day are joining All Raise, a nonprofit trying to close the funding gap for women

Join the conversation about this story »

NOW WATCH: 8 weird robots NASA wants to send to space

• Members Exchange filed an application with the SEC to become the nation's 15th stock exchange.
• The new venture is backed by major financial players including Morgan Stanley and UBS, and aims to compete with the New York Stock Exchange and Nasdaq by cutting fees for traders.
• MEMX is eyeing a mid-2020 launch, and could offer early traders rebates to kick-start activity on the exchange.
• Visit the Business Insider homepage for more stories.

A new project backed by major financial sector players applied for regulatory approval to compete with legacy stock exchanges including the New York Stock Exchange and Nasdaq.

The Securities and Exchange Commission published Members Exchange's application Thursday. The venture, also known as MEMX, was announced in January and looks to slash the lofty connectivity and data fees associated with major exchanges.

MEMX could launch as early as mid-2020 and become the country's 15th stock exchange if it wins approval from the SEC.

The exchange's investors include:

• Morgan Stanley
• UBS
• Bank of America
• Citadel Securities
• Virtu Financial
• Charles Schwab
• E*Trade
• Fidelity
• TD Ameritrade

The nine investing companies would each own part of the exchange, straying from popular exchanges' for-profit models. MEMX's name calls back to stock exchanges of the past, non-profit organizations owned by investing "members."

The venture raised $70 million in its first funding round, the Wall Street Journal reported in January.

The new exchange could offer traders rebates to kick-start activity on its platform and entice others to join, according to WSJ. Yet lower fees and trading rebates don't guarantee the venture will grow popular among investors in the slow-moving exchange landscape.

Legacy exchanges — NYSE-parent Intercontinental Exchange, Nasdaq, and Cboe Global Markets— collectively own twelve stock exchanges between them. 

The application filing arrives weeks after major brokerage firms including Fidelity, E*Trade, and TD Ameritrade slashed commission fees for traders. A lower-fee exchange could help the firms maintain their margins without their past levels of fee income.

Now read more markets coverage from Markets Insider and Business Insider:

Former Fed Chair Alan Greenspan doesn't expect a recession to arrive anytime soon — and uses one stat to argue his position

Warren Buffett-backed Kraft Heinz leaps after 3rd-quarter results signal turnaround

Ozy Media's CEO describes how he diversified into TV and events, landing $35 million in fresh funding and getting on track for profitability in 2020

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

• Morgan Stanley is cautioning investors that returns on a traditional investment portfolio made up of 60% stocks and 40% bonds could slide to century lows over the next decade. 
• The firm expects the annual return on a traditional 60/40 portfolio to fall to 2.8% over the next decade. 
• A combination of low growth, tempered inflation expectations, and falling yields could hamper upside, according to Morgan Stanley analysts. 
• Visit the Business Insider homepage for more stories.

Morgan Stanley is sounding the alarm on a popular investment portfolio. 

The bank is warning investors that the annual return on a traditional portfolio made up of 60% stocks and 40% bonds could fall to 2.8% over the decade, a near-century low and roughly half of the average over the last 20 years. 

The figure is based on the S&P 500 gaining about 4.9% annually and 10-year Treasuries yielding 2.1% over the next 10 years. 

Here's a graph depicting the historical returns of a traditional 60/40 portfolio and its predicted decline, according to Morgan Stanley. 

"The return outlook over the next decade is sobering – investors face a lower and flatter frontier compared to prior decades," the firm wrote in a note to clients Sunday. "Investors will need to accept much higher volatility to eke out small incremental units of return."

Morgan Stanley's analysts pointed to low growth prospects, weak inflation, and sliding yields as the primary drivers for muted returns. 

"US equities expected returns are dragged down by a combination of lower income return, low inflation expectations and penalties on both higher-than-average valuations and above-trend growth that cannot be sustained for the next decade," the analysts added. 

The firm also expects investors to shift capital out of high-yield bonds and into investment-grade credit as returns continue to slump. 

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

• Investment banks that worked on Saudi Aramco's record initial public offering could miss out on a huge payday now that the IPO is being kept local, Bloomberg reported.
• While advisers and arrangers will be compensated for costs, it may not be enough to make a significant profit, according to the report. 
• It's now likely that Saudi banks will reap most of the fees from the $25 billion Aramco is looking to raise, as most investors will come from inside the kingdom.
• Read more on Business Insider.

Investment banks that worked on Saudi Aramco's record-breaking initial public offering could miss out on a massive payday now that the IPO is being kept closer to home, Bloomberg's Matthew Martin, Javier Blas, and Dinesh Nair reported Tuesday.

That's because banks like Goldman Sachs and Morgan Stanley will reap less in fees now that Saudi Aramco will keep the IPO within Saudi Arabia, according to Bloomberg. In addition, while advisers and arrangers will be compensated for costs, it may not be enough to make a significant profit, the report stated, citing people familiar with the deal.

It was expected that more than two dozen advisers — including banks, lawyers, marketing and advertising agencies — would be paid between $350 million and $450 million, Bloomberg reported in October. Now, however, the payout amount will depend on how much Aramco equity banks can place with investors, according to the report. 

The Saudi Aramco IPO was a highly coveted project to work on, and it drew a huge group of 20 global investment banks, nine global coordinators, 15 bookrunners, and three financial advisers, according to the report. But after Wall Street banks were unable to hit Crown Prince Mohammed bin Salman's $2 trillion valuation target with a 5% sale, both the Saudi government and leaders of Aramco grew frustrated, Bloomberg reported. 

Now, it's likely that Saudi banks will reap most of the fees from the sale of Aramco, Bloomberg reported. This is because most of the $25 billion that Aramco is trying to raise will come from investors inside Saudi Arabia, according to the report.

On Sunday, the state-owned oil giant announced an IPO range that placed its valuation up to $1.7 trillion. That's the largest IPO ever, even though it was below the Crown Prince's goal of a $2 trillion valuation. 

But on Monday, investors learned that the London IPO roadshow had been canceled along with the company's Asian and American roadshows, making it a Saudi-only affair.

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

• Appleis the most valuable public company in the world — but it could get even bigger.
• Morgan Stanley analyst Katy Huberty told CNBC that its share price has higher to go and it's currently "under owned."
• Apple's stock is up 69% year to date,and with a market cap of $1.18 trillion, it's larger than the US energy sector. 
• View Business Insider's homepage for more stories. 
• Watch Apple trade live.

Apple is the most valuable public company in the world — but it could get even bigger.

Morgan Stanley's Katy Huberty told CNBC that its share price will get even bigger and that the stock is "under owned" and that "even the top 100 ... holders of Apple (stock) have a position that's less than the S&P 500 weighting."

The tech giant's market cap stands at $1.18 trillion, and Apple's stock is up 69% year to date.

"We still think the stock has room to run," said Huberty, who spoke to CNBC at the Morgan Stanley APAC Summit on Wednesday. The managing director and head of North American hardware tech research added that iPhone sales and share buybacks will help buoy the shares.  

CNBC noted that Morgan Stanley's 12-month price target for the stock is $296 — roughly 11% higher than Tuesday's close of $266.29. 

RBC echoed Huberty's sentiments last week, saying that it expected Apple's stock to rise 14% in the next year, — something that will take Apple's stock past Morgan Stanley's price target.

Bank of America found that Apple's market cap is bigger than the entirety of the US energy sector. Last week Business Insider reported that the iPhone next year could become the leader in the 5Gmarket.

Huberty added in the interview that the US-China trade war hasn't damaged Apple as much as expected. "In the December quarter, again, gross margin guidance was better than expected," adding that much of this was because Apple moved some its production away from China, where a bulk of parts and products are made. 

"With arguably the world's most popular consumer product providing a stable foundation, AAPL has avenues for deeper integration into its customers' lives and the balance sheet strength to return significant cash flow to shareholders," RBC analyst Robert Muller said in a note.

Muller's price target for Apple is just shy of Morgan Stanley's, at $295. 

Join the conversation about this story »

NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption

• Banks and hedge funds have to battle with each other as well as Silicon Valley for top talent. But there's been something of a truce, with developers from different firms working together on solving shared problems. 
• Once-secretive firms have started opening their code up to outsiders, including the Fintech Open Source Foundation, which held a forum in New York on Wednesday. 
• "Software is a new world. You have to be both in it and consuming it," Neema Raphael, Goldman Sachs' chief data officer, said at the event. 
• "The war for talent is over — all the talent is working on open source," said Donald Raab, a managing director at BNY Mellon.
• Click here for more BI Prime stories. 

Gabriele Columbro, the founder of the open-source code non-profit known as FINOS, sees a future where all financial services firms open up their code to outside developers. 

"In 10 years, the core of the global financial engine will be open source," he told an audience packed with Wall Street players just after showing a cartoon of JPMorgan CEO Jamie Dimon arm-wrestling Amazon founder and CEO Jeff Bezos.

In the hypercompetitive world of Wall Street, hedge funds, and other financial firms, the battle for tech talent has been a key front as more and more day-to-day business is handled almost entirely by technology. 

But that could soon change, execs said, as banks start to embrace the open-source vision. 

Open-source projects and programs, like the many run by the Fintech Open Source Foundation, allow banks to build tools and platforms internally using publicly available code from peers, vendors, and other developers — a drastic shift for an industry that usually close-guards every part of its organization.

A BNY Mellon executive even went so far as to declare a truce in the much-hyped fight between firms for tech talent.

"The war for talent is over — all the talent is working on open source," said Donald Raab, a managing director at BNY Mellon who was previously at Goldman Sachs, at the FINOS Open Source Strategy Forum in New York Wednesday. 

"You don't need to fight for talent, you need to collaborate for talent," he said.

Developers, Raab said, don't want to work on a project that's only going to be used internally at one bank — they want to be a part of a community. 

"If your developers aren't using open source, that's a nightmare situation for you," said Columbro. If a bank's tech talent isn't learning from others in the community, they are at risk at falling behind, he said. 

According to Aite Group, every big bank uses open source code in their systems, though to different extents. One big bank chief technology officer said 85% of the code at the firm is from the open source community, said Spencer Mindlin, an analyst for the consultancy. 

"Contribution could be a competitive differentiator in the future," Mindlin said, adding that Github, a subsidiary of Microsoft that hosts millions of software creators, "is the Instagram for developers." 

But big banks shouldn't just consume public code — they should be contributing as well, execs said.

Goldman Sachs chief data officer Neema Raphael used the FINOS event to announce that the bank's internal data management and delivery platform, Alloy, is going to have its code publicly released and hosted on FINOS' cloud next year.

One of JPMorgan's data tools, Perspective, has been available in open source forums since 2017 and recently shifted to FINOS as well.

Some hedge funds have been also been releasing home-built tools. Quant hedge fund Two Sigma last week announced its portfolio analytics platform Venn is now available to outsiders. Brevan Howard and Winton Group sell data collection and artificial intelligence offerings. 

Hedge funds have also been using external developers and quants to help them sort through their massive amounts of data through platforms like QuantConnect and Quantopian. 

"Software is a new world, you have to be both in it and consuming it," Goldman's Raphael said. 

The increased openness of banks has forced them to pick what they do best and focus on it, said Dov Katz, a managing director at Morgan Stanley and vice chair of FINOS. 

The thought process around risk management, for example, has changed from viewing everything as a potential risk to asking "where is the actual risk," he said. Morgan Stanley and its rivals are all trying to solve the same problem, and it can make more sense to collaborate than build separate technologies that will require constant maintenance. 

"There are problems all of us face that we want to solve. We now understand how to do it safely, we've come up with a way to measure and manage risk," Katz said in an interview with Business Insider at the conference. 

This will free up tech teams to work "on competitive advantages instead of the underpinnings and underlying parts of competitive advantages," he said. 

All of the biggest Wall Street firms have joined FINOS over the past 18 months. The conference on Wednesday, held at a Hell's Kitchen Off-Broadway theater house that is currently hosting Avenue Q, had more than 600 registrants, conference organizers said. 

SEE ALSO: Goldman Sachs' new CTO shares his strategy for attracting outside developers to work more closely with the bank, giving a glimpse into the future of how Wall Street will work

Join the conversation about this story »

NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.

• Andy Saperstein, the head of Morgan Stanley Wealth Management, described how the firm is training up its 15,000-plus financial advisers on digital tools. 
• The firm has turned to a group of junior, "technology-savvy"wealth management staffers, who are not yet full-fledged advisers, to assist financial advisers in getting up to speed on new capabilities.
• The process underscores the fast-changing dynamics between advisers and technology.
• Visit BI Prime for more wealth management stories.

For Andy Saperstein, the head of Morgan Stanley Wealth Management, convincing thousands of financial advisers to use new digital tools isn't difficult, or even the hardest part of meshing humans and machines.

The tricky part is getting them up to speed, and members of Morgan Stanley's wealth arm who are more digitally native are helping the process along. 

"Change is hard, no matter what it is," Saperstein said at an industry conference in New York on Wednesday.

Morgan Stanley launched a new planning and advice platform — a type of one-stop-shop for advisers' books of business called WealthDesk — just last year. 

Saperstein said the "stump speeches" he's delivered to Morgan Stanley's force of 15,000-plus US financial advisers have been well-received. But the training process is complex.

"That's really the trick, to understand that you have advisers that are very busy," he said. "They're working 24/7, and every night when they go to bed, they drop down exhausted. And they've been very successful, and part of what got them to be successful is likely not the fact that they're really technologists at heart."

Key to training up advisers is ensuring they knew precisely what kind of technology is available to them and how it would fit in with their everyday client interactions, Saperstein said.

The firm has turned to a group of junior, "technology savvy"wealth management staffers, who are not yet full-fledged advisers, to assist financial advisers in getting up to speed with new capabilities.

The process underscores the fast-changing dynamics between traditional financial advisers and the technology they increasingly have to embrace.  

The team members assisting Morgan Stanley advisers are trained up on all new capabilities and entered into a kind of "accreditation," Saperstein said, where they "have to sit in front of advisers and prove to the advisers that they would be useful to a team in the branch." 

In turn, this approach is a way to ease people into working with clients and existing adviser teams.

A generational gap for both advisers and clients has emerged industry-wise. The average financial adviser is 52 years old, according to market intelligence firm Cerulli Associates. Meanwhile, only around 10% of advisers are under 35, Cerulli estimates.

And millennials "appear less interested in previous generations about engaging an adviser," data and analytics provider Greenwich Associates said in a Wednesday report.

"Five years from now, seven years from now, they'll be fully functioning advisers with their own set of clients, but they won't have done it the old-fashioned way with cold-calling," Saperstein said. "They will have done it because they will have integrated into the team and served existing clients in a way they had never been served before." 

He added that the process comes with the benefit of creating a younger and increasingly diverse adviser force.

In general, working to incorporate less experienced people into teams is something we've also heard about from Bank of America's Merrill Lynch Wealth Management.

Merrill sees a team environment with experienced advisers as one asset to help boost graduation rates for its adviser training program, Merrill Lynch Wealth Management President Andy Sieg told us in an October interview.

Some 80%  of the advisers at Merrill are on teams, Sieg told us in that interview. That gives people access to a relatively wide customer base, he said, but means they also need to specialize skills quickly — in investment management, planning, or business development, for example. 

Evolving wealth tech

Morgan Stanley has other tech upgrades on its radar. 

We first reported last month that Morgan Stanley is looking to roll out a feature next year to help instantly analyze news and data about clients' portfolio holdings. That tool will be housed on the dashboard that the firm's financial advisers already have access to.

Some 79% of financial advisers Greenwich Associates recently interviewed said technology has had a "positive impact on their business." 

Morgan Stanley named Saperstein head of wealth management earlier this year after he co-led the unit with Shelley O'Connor, now the chief executive of Morgan Stanley Private Bank and Morgan Stanley Bank, for three years.

Morgan Stanley, among the largest US wealth managers, reported $2.6 trillion in clients assets last month, marking a 3% rise from a year ago. The unit's adviser headcount dropped by 102 people compared with the same time last year. Total representatives fell to 15,553 from 15,655 one year ago.

SEE ALSO: Morgan Stanley wants to roll out a feature for financial advisers to help instantly analyze news and data about portfolio holdings

SEE ALSO: Merrill Lynch hiked starting salaries for trainee advisers by $10,000 and has taken on 1,700 newbies so far this year. We have the details.

SEE ALSO: Citi's private bank is leaning on an apprenticeship approach to help pair young bankers with clients in line for big inheritances

Join the conversation about this story »

NOW WATCH: Most maps of Louisiana aren't entirely right. Here's what the state really looks like.

• Recession warnings are fading from their summer peaks, and stocks are set for another run-up as investors rush to participate in another rally, Morgan Stanley Investment Management senior portfolio manager Andrew Slimmon said in an interview.
• The volatility that previously came from trade war headlines has dulled, and Wall Street "has finally keyed into what's going on," he said.
• Slimmon pointed to recent years as precedent for how the S&P 500 performs after a negative year.
• The index saw two years of accelerating growth following 2011 and 2015 slumps, and Slimmon noted the market's performance through 2019 has matched the pattern.
• However, Slimmon is less optimistic beyond year-end. He says the S&P 500's strong returns this year could cap upside in 2020, while multiple factors point to a possible recession in 2021.
• Visit the Business Insider homepage for more stories.

Recession fears are cooling from their summer highs, and stocks are poised for another run-up as the historic expansion continues, according to Morgan Stanley Investment Management Senior Portfolio Manager Andrew Slimmon.

A slew of ingredients, including third-quarter earnings, trade war optimism, and positive economic data recently drove new records for the three major US stock indexes. Many investors who were holding less volatile assets now fear they could miss out on the market's next rally, and their trades are playing a big role in sending stocks higher, Slimmon said 

"The buying has only begun. We're in the first inning of capitulation back in the market," Slimmon said in a phone interview.

The prospect of a partial trade deal has also eased one of the most significant downward pressures on the stock market, the portfolio manager said. The volatility that came with every minor trade-deal headline has dulled, and Wall Street isn't as prone to sell in the wake of a negative headline, Slimmon said.

"It's all about the uncertainty. If tariffs have peaked, I think that removes some uncertainty, and that will help with a manufacturing rebound," he noted. "I think the market has finally keyed into what's going on."

The portfolio manager pointed to slumps in 2011 and 2015 as precedent for what he expects to happen in coming years. The S&P 500 index contracted over both years before posting multi-year rallies, and Slimmon expects the slump in 2018 will see a similar pattern before stocks turn bearish.

Though last year saw an "artificial low" from a late-December tumble, Slimmon still thinks 2018 serves as a "pause year" before recession worries are rejected and markets surge.

S&P 500 Yearly Performance (2009-2019)

The examples also point to a change in the kinds of stocks investors will look to buy in a market rally. The run-ups following 2011 and 2015 first saw value stocks soar, as the shares "were pricing in a recession," he said. Slimmon now thinks value companies are "overbought" after the third-quarter upswing, and recommends growth stocks for those looking to get the most value from an end-of-year leg-up.

"As investors come back into the market, I think they're going to look where they can get involve that hasn't done well," he said. "The area that has lagged recently are these high growth areas."

While Slimmon sees the bull run continuing through 2020, the biggest risk to the future gains may be the pace of the gains themselves. The jumps after 2011 and 2015 each lasted two years, with the S&P 500 gaining more in the second year of recovery than the first.

The index is now poised to end 2019 with a 25% jump, and it's "unlikely to see the same magnitude in a second year rally," Slimmon said. He added that, by 2021, the downturn signaled by August's yield curve inversion is scheduled to take effect.

Every US recession since 1950 has been preceded by a yield curve inversion, but it takes an average 22 months for an economic downturn to hit its hardest after such an event, according to Credit Suisse. That would place the trough of a market slump in July 2021.

There's no guarantee of economic recession in 2021, but Slimmon noted that a convergence of risk factors and the yield curve's historic relevance paint an ominous picture for investors. The 2020 presidential election could throw markets a curveball if a regulation-friendly candidate wins the White House. Stocks could also react negatively if a trade deal with China doesn't meet expectations. Even a streak of positive economic growth in 2020 could create a high bar for comparable figures the following year. Investors could be in for a rough year if enough of these variables hit markets at once, Slimmon said.

Now read more markets coverage from Markets Insider and Business Insider:

Former Fed Chair Janet Yellen says odds of a recession are 'higher than normal'

The world's best-performing stock of 2019 just lost 98% of its value in a single morning

Amazon's in-house delivery network is about to face the ultimate test this holiday season as the retail giant doubles down on competing with UPS and FedEx

• Financial advisers say robo advice is the most "over-hyped" technology in their industry, a survey found. That comes as low-cost robo and hybrid advice platforms have been growing assets in recent years. 
• Meanwhile, advisers view customer-relationship management (CRM) software, video conferencing, and self-service portals as the most high-impact, under-rated technologies. 
• The majority of the 2,500+ advisers surveyed by Greenwich Associates said they will spend more time communicating electronically with clients over the next five years. 
• The results underscore the fast-changing world of wealth management technology that encompasses far more than robo-advice popularized by the likes of Wealthfront and Betterment. 
• Visit BI Prime for more wealth management stories.

The array of options for both client- and adviser-facing wealth management-tech can be dizzying. The offerings can span the range from tools to help clients and advisers communicate better to robo-advisers that are seeking to eliminate the human touch entirely. 

A new report from Greenwich Associates, a Connecticut-based financial services data and analytics firm, found 71% of the 2,580 financial advisers surveyed labeled robo-advisers and automated investing as over-hyped.

Meanwhile, advisers said that a handful of digital capabilities that garner less public attention are actually the most important. 

They view customer relationship management (CRM) software, video-conferencing, and self-service portals as the most impactful, under-rated wealth technologies. Self-service portals include firms' digital offerings where client can access their accounts without consulting a representative. 

"Each enables advisors to better service their clients regardless of what investment vehicles they use and whether or not they chose to use a robo advisor to handle asset allocation," authors Dan Connell and Brad Tingley wrote. 

And over the next five years, 68% of advisers said they expect to spend more time communicating electronically with clients. Blockchain and social media were two other technologies advisers ranked as being the most over-hyped. 

The results underscore the fast-changing world of wealth management technology that encompasses far more than the robo-advice popularized by the likes of Wealthfront and Betterment.

To be sure, the report noted that advisers are likely "inherently biased," given the service robo-advisers are looking to provide. Still, "the data continues to reflect that people in this equation cannot be replaced, only augmented by technology that can leave them more efficient and informed," the authors wrote.  

Investors have committed billions of dollars in recent years to fund startups in the wealth-tech space. Global funding for wealth management-tech rebounded during the third quarter to $761 million after a slump earlier this year, according to data from CB Insights.

Meanwhile firms up the wealth management spectrum are adapting their technology offerings to serve new client needs. Morgan Stanley, the largest US wealth manager with nearly $2.6 trillion in client assets, last year rolled out a new platform for its 15,000-plus financial advisers called WealthDesk.

Andy Saperstein, the head of its wealth unit, said at an industry conference last week that the firm is turning to less experienced staffers to train up financial advisers on WealthDesk.

His comments highlighted not only the fast-changing relationship between advisers and technology, but in the generational gaps that come with implementing new tools. 

Morgan Stanley is hardly alone in its ambitions to refresh its legacy tech systems. We first reported earlier this month that investment firm Neuberger Berman plans to roll out new adviser-client portals, a new mobile application, and a client data hub across the firm by the end of next year. 

Other firms catering to high-net-worth clients are making digital strides for advisers and clients alike. The Swiss firm UBS, among the world's largest wealth managers with $2.5 trillion in client assets, is innovating for the well-heeled set in which it specializes.

John Mathews, who leads UBS's private-wealth management and ultra-high-net-worth business for the Americas, told us in August that he was exploring how the firm can utilize digital wealth capabilities for wealthier clients after seeing success in a collaboration with the robo-adviser SigFig for relatively smaller accounts.

Join the conversation about this story »

NOW WATCH: 5 things about the NFL that football fans may not know