The Tell: Why Morgan Stanley’s is starting to see “fire and ice” and a bear market drop as ‘more likely’ for stock-market investors


Morgan Stanley’s Michael Wilson sees the bull market ending in fire, though it could end in ice.

Invoking the imagery from the Robert Frost poem Fire & Ice, the Morgan Stanley strategist said that he sees earnings revisions from American corporations “and higher frequency macro data” pointing to a decelerating economy, “amid demand pull forward, supply chain issues and margin pressure,” which he forecasts could lead to a 20% drop, a near-term outcome that he describes as “ice” for investors, in a research note dated Sept. 20.

Wilson wrote that he is starting to see a 20% fall as a “more likely” outcome for equity markets. However, during an interview on CNBC on Tuesday, the strategist maintained that 10% is still his “base case” scenario and held his forecast for the S&P 500 index to end the year around 4,000.

A fall of at least 20% from a recent peak is a widely accepted definition of a bear market, while a drop of 10% defines a correction.

His “fire” scenario, which he speculates would lead to a 10% slide for the market, would be precipitated by the Federal Reserve initiating its efforts to “remove monetary accommodation in response to an overheating economy.”

The Fed will conclude its September meeting on Wednesday, and release an updated policy statement and a new set of projections for interest rates, including 2024 for the first time.

The equity market already has been under selling pressure for several sessions before Monday’s slump which was partially attributed to concerns about possible global systemic risk resulting from a potential debt default by one of China’s biggest property developers: Evergrande

On Monday, the S&P 500

and the Nasdaq Composite

notched the worst daily declines since May 12 and the Dow Jones Industrial Average

registered the sharpest one-day fall since July 19.

The S&P 500 hasn’t seen a 5% pullback from its peak in about 220 sessions, the longest run since 2016, when the market went 404 sessions without falling by at least 5% peak to trough, according to Dow Jones Market Data.

Monday’s fall has the index about 4% from its Sept. 2 record close, while the Dow is off 4.65% from its Aug. 16 record and the Nasdaq Composite is down 4.3% from its Sept. 7 recent peak.

Wilson said that the break of the S&P 500 below its 50-day moving average, which occurred on Friday and then deepened on Monday, represents a change of trend for investors.

“Well, I think the trend broke, so we did eventually” take out “the 50-day moving average…and it broke violently yesterday… and I think you gotta pay attention to that, Wilson said in his CNBC interview.

“I respect the market and I would suggest other people respect the market… and what that’s saying is that that trend was challenged,” Wilson said.

“I’m comfortable with our call,” he said, pooh-poohing criticism that investors have consistently bought the dip in this euphoric, pandemic-recovery cycle.

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