MorganStanley urges investors not to put their money into stocks despite the market jump following the Fed decision.
Mike Wilson, the firm’s chief US equity strategist and chief investment officer, said he believes the excitement on Wall Street is over the notion that rate hikes might slow sooner than expected is premature and problematic.
“The market always recovers once the Fed stops rising until the recession starts. … [But] There is unlikely to be a large gap between the end of the Fed hike and the recession this time around,” he told CNBC: “Quick money” on Wednesday. “Ultimately, that’s going to be a trap.”
According to Wilson, the most pressing issues are the impact of the economic slowdown on corporate earnings and the risk of excessive Fed tightening.
“The market has been a bit stronger than you would have thought as growth signals have been consistently negative,” he said. “Even the bond market is now beginning to believe that the Fed is likely to go too far and push us into a recession.”
His forecast also includes a call for the market to go lower before reaching the year-end target. Wilson is bracing for the S&P to drop below 3,636, the 52-week low hit last month.
“We are nearing 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 stop and we need to take that final step and I don’t think the June low is the final step.”
Wilson believes the S&P 500 could fall as low as 3,000 points in 2022 in a recession scenario.
“It’s really important to design any investment in terms of ‘what’s your advantage over your disadvantage,'” he said. “You take a lot of risks here to achieve what is still on the table. And for me it is not an investment.”
Wilson thinks about himself positioned conservatively – He points out that he is underweight stocks and likes defensive plays, including health care, REITs, consumer goods and Utilities. He also sees the merits of holding extras Cash and Bind at the moment.
And he’s in no rush to work money, and has been “hanging around” until there are signs of a bottom in stocks.
“We try to give them something [clients] a good risk-reward. Right now the risk/reward ratio is, I’d say, about 10 to one negative,” Wilson said. “It’s just not great.”