Morgan Stanley is urging investors not to invest their money in stocks despite the market surging after the Fed’s decision.
Mike Wilson, the company’s chief U.S. equity strategist and chief investment officer, said he thought Wall Street’s enthusiasm that interest rate hikes could slow sooner than expected was premature. and problematic.
“The market always recovers once the Fed stops climbing until the start of the recession. … [But] there is unlikely to be much of a gap this time between the end of the Fed’s hike campaign and the recession,” he told CNBC’s “Fast Money” on Wednesday. “In the end, it 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 tightening by the Federal Reserve.
“The market has been a little stronger than you would have thought given that growth signals have been consistently negative,” he said. “Even the bond market is now starting to accept that the Fed is likely to go too far and push us into recession.”
“Near the End”
Wilson has a year-end price target of 3,900 on the S&P 500, one of the lowest on Wall Street. This implies a 3% decline from Wednesday’s close and a 19% decline from the index’s closing high in January.
His forecast also includes a call for the market to go down again before hitting the end-of-year target. Wilson is bracing for the S&P to fall below 3,636, the 52-week low hit last month.
“We’re nearing the end. I mean this bear market has been going on for a while,” Wilson said. “But the problem is it won’t stop, and we need to have that last move, and I don’t think the June low is the last move.”
Wilson thinks 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 advantage versus your disadvantage,'” he said. “You’re taking a lot of risk here to achieve whatever’s on the table. And, to me, that’s not investing.”
Wilson sees himself as conservatively positioned – noting that he is underweight equities and likes defensive plays, including healthcare, REITs, consumer staples and utilities. He also sees the merits of holding extra cash and bonds for the time being.
And, he’s in no rush to put cash to work and has been “dragging” until there are signs of a stock bottom.
“We try to give them [clients] good risk-reward. Right now the risk-reward, I would say, is about 10 to one negative,” Wilson said. “It’s just not great.”