Morgan Stanley warns of potential bear market in US stocks

New York
CNN Business

Stock markets are turbulent and Morgan Stanley is warning clients that the ride is about to get even bumpier.

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 picky at this point that it is unclear where the next rotation lies,” Wilson wrote. “In our experience, when that happens, it usually means the overall index is about to drop sharply with almost all stocks falling in unison.”

Morgan Stanley says the context “suggests” the S&P 500 will enter a bear market, signaling a 20% drop from previous highs. Recent selling may support the view that markets are moving into a “much broader sell-off phase,” the bank said.

US stocks fell sharply last week, including a nearly 1,000-point drop in the Dow Jones on Friday alone, on concerns about aggressive steps the Federal Reserve will take to rein in very high inflation. Including modest losses on Monday, the S&P 500 is down 12% from record highs set in early January.

The S&P 500, the broadest gauge of US equities, 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.

However, the Nasdaq plunged into a bear market in early March as oil prices soared and inflation fears mounted.

Morgan Stanley said investors are buying into the bank’s fire and ice narrative of an overheated market and economy cooling down dramatically. The final chapter, Morgan Stanley said, is a “fast-tightening Fed right in the middle of a slowdown.”

Others are more optimistic about the risks that inflation poses to the stock market and the economy.

“Inflation should ease 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 note to clients on Monday.

Indeed, some economists are hopeful that inflation may finally be at or near its peak.

Morgan Stanley shares that opinion, although the bank does not see it as a positive thing. Instead, Morgan Stanley says lower inflation will be accompanied by slower growth in GDP, sales and earnings, all of which are negative for stocks.

“While others have been using this as a bullish argument,” Morgan Stanley wrote, “we would like to send out a clear warning: Be careful what you wish for.”

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