Investors should sell any stock-market rally over the next 8 weeks as Fed tightening and soaring energy prices pose huge risks, Morgan Stanley's Mike Wilson says
Morgan Stanleyanalysts are telling investors to sell into any relief rally in the stock market.
- The next six to eight weeks will pose significant risks, from Fed policy to rising
Any rally in the stock market should be taken an as opportunity to sell as investors are facing a convergence of risk factors that will pose outsized risks to the market, Morgan Stanley analysts wrote in a note on Monday.
The Federal Reserve is unlikely to deviate from its path of raising interest rates this year, even as pressure on the economy mounts, analysts led by
"We are firmly in the grasp of a bear market that is incomplete in both time and price."
The bank pointed to the increase of risks to growth, spiking oil prices, and headwinds from the war in
With oil surging to levels not seen since the last financial crisis, the bank pointed out that among the biggest risks is a drop in consumer spending and a subsequent blow to stocks in the consumer discretionary sector.
The bank says risks to the consumer stocks are not yet priced in for several reasons.
"The recent squeeze in oil prices puts even more pressure on consumer sentiment/spending intentions for durable goods which are already historically depressed. We haven't seen earnings cuts yet despite a host of risks...and the growing risk of excess inventory being built and ultimately having an adverse impact on pricing is not yet discounted."
The US central bank has signaled it will continue with its hawkish pivot announced last fall. Morgan Stanley analysts said that while the recent fall in the 10-year Treasury yield may suggest investors are hoping for a more dovish pivot, this is merely indicative of a flight to safe haven assets amid the conflict in Ukraine.
Investors, then, should tread cautiously. When looking for what stocks to own, the bank recommended focusing on factors like earnings stability and operational efficiency, though it noted that there are a smaller subset of potential winners than before.
Oil prices this weekend barreled past $130 a barrel, and Western nations have weighed new sanctions on Russian energy exports. A Yale economist noted that a Russian default could spill over into emerging markets, and would have global repercussions.
"Any relief should be sold," the analysts continued. "We recommend staying defensively oriented by running less risk than normal and searching for companies with superior operational efficiency and earnings stability."
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