Don’t buy the stock market rally, Morgan Stanley warns: ‘Another bear market trap’
Surprising rally in US stock market early 2023 is likely to fail as the Federal Reserve prepares to challenge investors’ hopes and raise interest rates for the eighth time in a row, according to Morgan Stanley.
Michael Wilson, director of US equity strategy at Morgan Stanley and a longtime Wall Street speculator, warned in an analyst note on Monday that despite the possibility recent market rally, “reality is likely to return towards the end of the month and the Fed’s determination to tame inflation.”
“We think recent price action reflects a seasonal January effect and short-term offset following a rough end to December and a brutal year,” Wilson wrote.
He has previously suggested that the S&P 500 could drop to 3,000 points by year-end, about 25% off current levels. The benchmark index has fallen about 19% by 2022.
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Year-to-date, stocks have rallied, with the S&P index up about 5% on Monday following some better-than-expected economic reports that showed inflation was cooling. Other reports, including December jobs data, have indicated that the economy is slowing, boosting hopes that the Federal Reserve will pause its aggressive interest rate hike campaign sooner than expected. before. Meanwhile, the Nasdaq Composite is up about 9%, while the Dow is up more than 600 points.
Although the relief rally has led more investors to join because they fear missing out, it is unlikely to last for long. Inflation slows down according to Wilson.
“The reality is that earnings are even worse than scary based on the data, especially when it comes to margins,” Wilson said. “Second, investors seem to have forgotten the basic ‘Don’t fight the Fed’ rule. Perhaps this week will serve as a reminder.”
He called the recent rally a “bear trap,” as “all the good news is now priced in.”
Wilson isn’t alone in warning that the rally could soon die out: Goldman Sachs analysts earlier this month said the S&P could plunge 22% this year if the economy slips into recession. Even without a recession, Goldman strategists predict the stock will fall another 10%.
Still, Wilson’s note contains a glimmer of hope for investors: He sees the bear market eventually ending at the end of this quarter or early in the second quarter.
Fed policymakers voted to raise the base rate seven times in a row last year to between 4.25% and 4.5%, which is in limited territory.
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Officials also laid out a roadmap for aggressive rate hikes for 2023 and said they intend to keep rates high for “some time.” Markets widely expect the central bank to approve a 25 basis point rate hike at the conclusion of its two-day meeting on Wednesday.