Morgan Stanley warns: ‘Trap’ post-Fed stock recovery

Morgan Stanley chief analyst Mike Wilson, who correctly predicted Wall Street’s first-half plunge, is warning investors to hold back on stocks despite the market’s rally in response to yesterday’s Fed decisions.

According to Wilson, who spoke to CNBC after yesterday’s Wall Street jump, Wall Street’s excitement over the idea that the Fed will begin to slow its rate hikes is premature and problematic.

“The market always rallies around the time the Fed stops hiking until the recession starts. But this time there is unlikely to be much of a time gap between the end of Fed tightening and the recession,” he said, adding that “ultimately analysis, it will be a trap”.

According to Wilson, the most pressing issues at this stage are the effect the economic slowdown will have on corporate profits and the risk of excessive tightening by the Federal Reserve.

“The market has been a bit stronger than you’d expect given that growth signals have been consistently negative. Even the bond market is now starting to accept that the Fed will probably go too far and lead us into a recession.” , he pointed out.

It is noted that Wilson’s year-end target price for the S&P 500 is 3,900 points, one of the lowest in the market, and represents a decline of more than 3% from yesterday’s close and more than 19% from the high reached in January.

His forecast also includes another bearish move that could take the S&P 500 below 3,636 — the 52-week low it hit last month.

“The current bear market has lasted long enough but the problem is that it’s not over and we need to make that final move, which I don’t think was the June low,” he said.

In fact, Wilson believes the S&P 500 could fall as low as 3,000 in a recession scenario by 2022.

As he points out, it’s really important to frame every investment with the question of what is the maximum benefit versus the maximum loss. At this stage “you’re taking a lot of risk picking up what’s left on the table. And to me that’s not an investment,” he said.

He considers himself conservatively positioned, noting that he is underweight stocks and defensively likes sectors such as health care, real estate, consumer staples and utilities. He also sees advantages in holding cash and bonds right now.

As he concluded, “we try to give our customers a good risk-reward. Right now, the risk-to-reward ratio I’d say is about 10 to 1. And that’s not good.”