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Morgan Stanley’s Michael Wilson sees the bull market ending on fire, although it could end on ice.
Citing imagery from Robert Frost’s poem “Fire & Ice,” the Morgan Stanley strategist said he sees revisions in US corporate earnings “and higher frequency macro data” indicating a decelerating economy , “Amid forward demand, supply chain issues and pressure on margins,” which he says could lead to a 20% drop, a short-term result he calls “ice.” for investors, in a research note dated September 20.
Wilson wrote that he was starting to see a 20% drop as a “more likely” outcome for the stock markets. However, in an interview on CNBC on Tuesday, the strategist maintained that 10% is still his “baseline” scenario and kept his forecast for the S&P 500 Index to end the year around 4,000.
A fall of at least 20% from a recent peak is a widely accepted definition of a bear market, while a 10% fall defines a correction.
His “fire” scenario, which he said would lead to a 10% drop in the market, would be precipitated by the Federal Reserve initiating its efforts to “remove monetary accommodation in response to an overheating economy.”
The Fed will close its September meeting on Wednesday and issue an updated policy statement and a new set of interest rate projections, including 2024 for the first time.
The equity market was already under selling pressure for several sessions before Monday’s drop, which was in part attributed to concerns about a possible global systemic risk resulting from a possible default by one of the biggest real estate developers from China: Evergrande 3333,
Monday, the S&P 500 SPX,
and the Nasdaq Composite COMP,
recorded the worst daily declines since May 12 and the DJIA Dow Jones Industrial Average,
recorded the largest single-day drop since July 19.
The S&P 500 has not seen a 5% decline from its peak in around 220 sessions, the longest time since 2016, when the market went through 404 sessions without falling at least 5% from peak to trough, according to Dow Jones Market Data.
Monday’s drop put the index around 4% from its September 2 high, while the Dow Jones is down 4.65% from its August 16 high and the Nasdaq Composite is down 4.3% from its recent peak on September 7.
Wilson said the breakout of the S&P 500 below its 50-day moving average, which occurred on Friday and then deepened on Monday, represents a trend change for investors.
“Well I think the trend broke, so we finally ‘removed’ the 50 day moving average… and it broke hard yesterday… and I think you need to be careful of that, said Wilson in his interview with CNBC.
“I respect the market and I would suggest to others to respect the market… and that means this trend has been challenged,” Wilson said.
“I am comfortable with our call,” he said, bitterly criticizing the fact that investors have always bought the bottom of this euphoric cycle of pandemic recovery.
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