Despite the market’s increase following the Fed decision, Morgan Stanley is advising investors to hold off on investing in stocks.
The company’s chief U.S. equity strategist and chief investment officer, Mike Wilson, said he thought Wall Street’s euphoria about the possibility that interest rate hikes may slow down earlier than anticipated was unwarranted and worrisome.
“The market always rallies once the Fed stops hiking until the recession begins. … [But] it’s unlikely there’s going to be much of a gap this time between the end of the Fed hiking campaign and the recession,″on Wednesday, he informed on CNBC’s “Fast Money.” “Ultimately, this will be a trap.”
The impact of the economic slowdown on corporate profitability and the possibility of the Fed overtightening are, in Wilson’s opinion, the two most urgent concerns.
“The market has been a bit stronger than you would have thought given the growth signals have been consistently negative,” he said. “Even the bond market is now starting to buy into the fact that the Fed is probably going to go too far and drive us into recession.”
Wilson has one of the lowest S&P 500 price targets on Wall Street with a 3,900 year-end estimate. That suggests a 3 percent decline from the closing price on Wednesday and a 19 percent decline from the closing high reached in January by the index.
Prior to reaching the year-end target, his projection also calls for the market to make another move lower. The 52-week low of 3,636 was reached last month, and Wilson expects the S&P to drop below that level.
“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 it won’t quit, and we need to have that final move, and I don’t think the June low is the final move.”
Wilson thinks that in a 2022 recession, the S&P 500 might drop as low as 3,000.
“It’s really important to frame every investment in terms of ‘What is your upside versus your downside,’” he said. “You’re taking a lot of risk here to achieve whatever is left on the table. And, to me, that’s not investing.”
Wilson describes his approach as cautious, saying that he is underweight equities and favours safe bets including those in the healthcare, REIT, consumer staples, and utilities sectors. He also sees benefits in currently holding excess cash and bonds.
Additionally, he has been “hanging out” until there are indications of a stock market dip because he is not in a rush to invest his money.
“We’re trying to give them [clients] a good risk-reward. Right now, the risk-reward, I would say, is about 10 to one negative,” Wilson said. “It’s just not great.”