Morgan Stanley is urging investors to hold off on putting their money to work in stocks despite the market jump following the Fed’s decision.
Mike Wilson, the firm’s chief U.S. strategist and chief investment officer, said he believes Wall Street’s enthusiasm over the idea that interest rate hikes may slow earlier than expected is premature and problematic
“The market always recovers once the Fed stops walking until the recession starts… [But] It is unlikely that there will be a large gap between the end of the Fed’s hiking campaign and the recession this time,” he said on CNBC’s “Fast Money” on Wednesday. “In the end, this will be a trap.”
According to Wilson, the most pressing issues are the effect the economic slowdown will have on corporate earnings and the risk of excessive Fed tightening.
“The market has been a little bit stronger than you would have thought, given that the growth signals have been consistently negative,” he said. “Even the bond market is now starting to accept the fact that the Fed will probably go too far and lead us into recession.”
‘Near the end’
Wilson has a year-end price target of 3,900 S&P 500, one of the lowest on Wall Street. That represents a 3% drop from Wednesday’s close and a 19% drop from the index’s closing high in January.
His forecast also includes a call for the market to drop again before reaching the year-end target. Wilson is bracing for the S&P to fall below 3,636, the 52-week low hit last month.
“We’re getting close to the end. I mean this bear market has been going on for a while,” Wilson said. “But the problem is that it’s not going to come out, and we have to make that final move, and I don’t think the June low is going to be the final move.”
Wilson believes the S&P 500 could fall as low as 3,000 in a 2022 recession scenario.
“It’s really important to frame every investment in terms of ‘What’s your upside versus your downside,'” he said. “You’re risking a lot here to get what’s left on the table. And, to me, that’s not investing.”
Wilson considers himself a conservative position, noting that he is underweight stocks and likes defensive plays such as health care, REITs, consumer staples and utilities. He also sees the merits of holding extra cash and bonds at this time.
And, he is in no rush to put the money to work and has been “hanging out” until there are signs of a dip in stocks.
“We are trying to give them [clients] a good risk reward. Right now, I’d say the risk-reward is about 10 to one negative,” Wilson said. “It’s not great.”
Exemption from liability
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