Morgan Stanley’s Chief Investment Officer and U.S. Equity Strategist Mike Wilson warned of an imminent sharp drop in the S&P 500 as investors scramble for safe havens amid rising fear of a recession and aggressive tightening by the Federal Reserve.
Investors have “very few places to hide” in markets right now, strategists led by Wilson wrote in an April 25 note. Even defensive stocks have caved to the pressure in recent days.
“With defensive stocks now expensive and offering little absolute upside, the S&P 500 appears ready to join the ongoing bear market,” strategists wrote. “The market has been so picked over at this point, it’s not clear where the next rotation lies. In our experience, when that happens, it usually means the overall index is about to fall sharply with almost all stocks falling in unison.”
The S&P 500 has been in a bull market since March 2020 when the U.S. Federal Reserve began unprecedented economic stimulus to counteract the covid-19 recession.
Recent selling could lend support to the view that markets are moving into a “much broader sell-off phase,” Morgan Stanley strategists said.
U.S. stocks fell sharply last week, including the Dow, which dropped almost 1,000 points on Friday alone.
Widely regarded as the best single gauge of large-cap U.S. equities, the S&P has slumped for three weeks in a row, finishing mostly higher Wednesday after coming close to entering its second market correction of 2022. A correction is generally agreed upon as a 10-to-20 percent drop in value from a recent peak.
The S&P is at 4216.98 as of this writing. It will enter correction territory if it closes at less than 4168.444, according to Dow Jones Market Data. It notched 70 record highs during 2021 and its 52-week high is $4,818.62.
Federal Reserve Chairman Jerome Powell is moving into a higher gear on monetary tightening. At their May meeting, they’re expected to approve plans to shrink their $9 trillion asset portfolio and to raise the benchmark rate by half a percentage point, with another half-point expected in June.
The Fed is looking “right into the teeth of a slowdown,” Morgan Stanley strategists said.
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