Morgan Stanley is urging investors to resist spending their money in stocks despite the market’s jump after the Fed decision.
Mike Wilson, the firm’s chief U.S. equity strategist and chief investment officer, said he believes Wall Street’s excitement over the idea that interest rate hikes may slow faster than expected is premature and problematic.
“The market always rises when the Fed stops hiking until the recession starts. … [But] It is unlikely that there will be much of a gap this time between the end of the Fed̵[ads1]7;s hiking campaign and the recession,” he told CNBC’s “Fast Money” on Wednesday. “Ultimately, this will be a trap.”
According to Wilson, the most pressing issues are the effect the economic downturn will have on corporate earnings and the risk that the Fed will tighten too much.
“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 push us into recession.”
‘Near the End’
Wilson has a 3,900-year price target on the S&P 500, one of the lowest on Wall Street. This means a drop of 3% from Wednesday’s close and a drop of 19% from the index’s closing high in January.
His forecast also includes a call for the market to take another leg lower before reaching the year-end target. Wilson is bracing for the S&P to fall below 3,636, the 52-week low hit last month.
“We’re coming to the end. I mean this bear market has been going on for a while,” Wilson said. “But the problem is that it won’t stop and we have to have the final move, and I don’t think the June low is the final move.”
Wilson believes the S&P 500 could fall as low as 3,000 in a recession scenario in 2022.
“It’s very important to frame every investment in terms of ‘What’s your upside versus your downside,'” he said. “You’re taking a lot of risk here to achieve what’s left on the table. And for me, that’s not investing.”
Wilson considers himself conservatively positioned — noting that he is underweight stocks and likes defensive plays including health care, REITs, consumer staples and utilities. He also sees benefits in having extra cash and bonds at the moment.
And he is in no hurry to put money to work and has “hung out” until there are signs of a bottom in the shares.
“We try to give them [clients] a good risk reward. Right now the risk reward is, I’d say, about 10 to a negative,” Wilson said. “It’s just not good.”