Morgan Stanley’s Wilson Says Don’t Buy Rally When the Fed Shows

(Bloomberg) — Investors flocking to the stock rally will be disappointed that they are directly challenging the Federal Reserve, according to Morgan Stanley strategists.

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“Better price action in equities has begun to convince many investors that they are missing something — forcing them to participate more actively,” a group led by Michael Wilson wrote in a note. . “We think recent price action is more reflective of seasonal January effects and short-term offsets after a tough December ended and a brutal year.”

In fact, earnings were worse than expected, especially in terms of profits, they said. “Secondly, investors seem to have forgotten the basic rule of ‘Don’t go against the Fed.’ Maybe this week will be a reminder.”

Officials at the US central bank were poised to raise their benchmark federal funds rate by a quarter of a percentage point on Wednesday, returning the gains for the second straight meeting. The move follows a flurry of recent data showing the Fed’s aggressive campaign to slow inflation is working.

The S&P 500 has rallied since earnings season began, extending the new year’s rally. Even when there are signs of a recession, investors are still rewarding companies that exceed expectations and easing the punishment for those that fall short. Bloomberg Intelligence’s Wendy Soong attributes that momentum to restructuring efforts and cost-cutting plans that have added confidence to investors.

However, a Fed unwilling to switch to a more dovish stance “along with the fact that the worst earnings recession since 2008 is being mispriced again, in our view,” Wilson said. speak. “We think this will lead to the final phase of a bear market in the short term.”

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