Warning Sign: S&P 500 Could Slide Up to 26% in First Half of 2019
By Morgan Stanley strategists have suggested that expensive US equities may be a warning sign of the S&P 500 dropping by as much as 26% in the initial half of 2021.[0] The sell-off could be triggered by the Federal Reserve’s interest rate hikes over the past year, which have left the economy more expensive than at any time since 2007 by the measure of equity risk premium.
The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn't coming, according to Morgan Stanley strategist Michael Wilson.[1] “As [stocks] have reached even higher levels, there is now talk of a ‘no landing’ scenario—whatever that means … Such are the tricks the death zone plays on the mind—one starts to see and believe in things that don’t exist,” he said.[2]
He highlighted that the risk-to-reward ratio for equities is currently “very poor,” particularly with current high corporate earnings expectations and the Federal Reserve not close to concluding its monetary tightening process.[3]
JPMorgan Chase & Co. strategist Marko Kolanovic is also turning more defensive, recommending that investors fade this year’s stock rally because “a recession is currently not priced into equity markets.”[4] It’s too early to say a recession is off the table, especially since monetary policy’s impact on the economy can have a lag of one to two years, a team led by Mislav Matejka wrote in a note.[5] It is believed that the central bank will only act if the macroeconomic situation is much worse than the market currently anticipates, they noted.[6]
US stocks have enjoyed a strong start to the year, with the benchmark indexes S&P 500 and Nasdaq Composite up 8% and 15%, respectively, largely due to rapidly cooling inflation.[7] But investors that have turned too optimistic about the economic outlook are setting themselves up for disappointment, according to JP Morgan strategists.[6]
0. “Morgan Stanley's Wilson says S&P 500 could drop 26% in months” The Edge Markets MY, 21 Feb. 2023, https://www.theedgemarkets.com/node/656129
1. “Bear market rally ‘based on a Fed pause/pivot that isn't coming': Morgan Stanley strategist” The Globe and Mail, 21 Feb. 2023, https://www.theglobeandmail.com/investing/markets/inside-the-market/article-bear-market-rally-based-on-a-fed-pausepivot-that-isnt-coming-morgan
2. “Wall Street’s top strategist warns stocks have climbed into the ‘death zone’ where ‘they shouldn’t go and cannot live very long’” Yahoo! Voices, 20 Feb. 2023, https://www.yahoo.com/now/wall-street-top-strategist-warns-170944264.html
3. “US Equity Valuations At ‘Death Zone,' S&P 500 Might Fall By 25 Percent: Morgan Stanley Strategist” The Epoch Times, 21 Feb. 2023, https://www.theepochtimes.com/us-equity-valuations-at-death-zone-sp-500-might-fall-by-25-percent-morgan-stanley-strategist_5072988.html
4. “JPMorgan's Kolanovic Urges Investors to Ditch Stocks for Bonds” Financial Post, 13 Feb. 2023, https://financialpost.com/pmn/business-pmn/jpmorgans-kolanovic-urges-investors-to-ditch-stocks-for-bonds
5. “JPMorgan warns stock rally will fizzle with Fed fallout ‘still ahead of us'” Fox Business, 20 Feb. 2023, https://www.foxbusiness.com/markets/jpmorgan-warns-stock-rally-will-fizzle-fed-fallout-ahead-us
6. “JPMorgan Strategists Say Stock Rally Will Fade By Bloomberg” Investing.com, 20 Feb. 2023, https://www.investing.com/news/stock-market-news/jpmorgan-strategistssaystock-rally-will-fade-3008067
7. “Ditch stocks for bonds because a recession is guaranteed: JPMorgan” Markets Insider, 14 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-bonds-recession-inflation-jpmorgan-marko-kolanovic-2023-2
