Investors have “very few places to hide” in the markets right now, with even defensive stocks succumbing to pressure in recent days, Morgan Stanley equity strategists led by Mike Wilson wrote on Monday.
“The market has been so picked at this point that it’s unclear where the next rotation will be,” Wilson wrote. “In our experience, when this happens it usually means the overall index is about to fall sharply, with almost all stocks falling in unison.”
Morgan Stanley says the backdrop “suggests” the S&P 500 will enter a bear market, signaling a 20% decline from previous highs. Recent selling may support the idea that markets are entering a “much broader selling phase”, the bank said.
The S&P 500, the broadest gauge of US stocks, has been in a bull market since late March 2020, when the Federal Reserve came to the rescue with unprecedented support amid the deep recession caused by Covid-19.
Morgan Stanley said investors buy into the bank’s incendiary narrative of an overheated market and economy that is cooling significantly. The final chapter, Morgan Stanley said, is “rapid Fed tightening to the teeth of a downturn.”
Others are more optimistic about the risks inflation poses to the stock market and the economy.
“Inflation is expected to decline from current levels, and we don’t expect a recession from rising interest rates,” Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a statement on Monday. note to customers.
Indeed, some economists hope that inflation could finally reach or approach a peak.
Morgan Stanley shares this view, although the bank does not view this as a positive. Instead, Morgan Stanley says easing inflation will be accompanied by slowing GDP growth, sales and earnings, all of which are negative for stocks.
“While others have used this as a bullish argument,” Morgan Stanley wrote, “we would like to send a clear warning – be careful what you wish for.”