Morgan Stanley is urging investors to resist putting their money to work in stocks, despite the market’s jump following the Fed’s decision.
Mike Wilson, the company’s chief US equity strategist and chief investment officer, said he believes Wall Street’s excitement over the idea that rate hikes could slow earlier than expected is premature and problematic.
“The market always recovers as soon as the Fed stops walking until the recession starts. … [But] it is unlikely that there will be a big gap between the end of the Fed walking campaign and the recession this time around,” he told CNBC’s “Fast Money” on Wednesday. “Eventually 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 the Fed tightening too much.
“The market has been a little stronger than you thought, as growth signals have been consistently negative,” he said. “Even the bond market is now beginning to see that the Fed is probably going too far and driving us into a recession.”
‘close to the end’
Wilson has a year-end price target of 3,900 on the S&P 500, one of the lowest on Wall Street. That implies a 3% decline from Wednesday’s closing price and a 19% decline from the index’s closing price in January.
His forecast also includes a call to the market to lower one more leg before hitting the year-end target. Wilson is bracing for the S&P to fall below 3,636, its 52-week low from 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 doesn’t stop, and we have to take that last step, and I don’t think the June low is the last step.”
Wilson believes the S&P 500 could fall to 3,000 in a 2022 recession scenario.
“It’s really important to frame any investment in terms of ‘what’s your advantage versus your disadvantage,'” he said. “You take a lot of risk here to achieve what is still on the table. And that is not an investment for me.”
Wilson considers himself conservative – noting that he is underweight equities and likes defensive moves, including healthcare, REITs, consumer staples and utilities. He also sees benefits in holding additional cash and bonds at this time.
And he’s in no rush to put money to work and “hangs out” until there are signs of a stock low.
“We try to give them [clients] a good risk return. Right now the risk reward is, I’d say, about 10 to one negative,” Wilson said. “It’s just not great.”