‘We suspect the first correction since October has begun…but will be contained to 5% or less for the S&P 500 as liquidity remains flush…’
Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, says the first major stock market pullback since October may be under way.
The strategist, in a research report dated Jan. 27, references “correction,” which market technicians usually define as a decline from a recent peak of at least 10%. However, his prediction that the market is more likely to decline by half that much indicates that he’s forecasting a retreat from stocks that have hovered near records rather than a traditional correction.
Wall Street investors, perhaps, shouldn’t need the strategist to determine the current state of the equities, however.
The Dow Jones Industrial Average DJIA, -1.30% was off about 550 points at its lows on Monday, while the S&P 500 SPX, -1.29% slumped to an intraday nadir of 3,234.50 and the Nasdaq Composite Index COMP, -1.53% was tumbling 1.5%, after hitting a session low at 9,088.04. All three benchmarks were off their worst levels for the day but holding sharply in negative territory in afternoon action.
Stock markets have skidded south in the past several sessions, with the Dow momentarily losing its grip on gains for 2020, as a rapidly spreading virus in China has sparked fears of a global outbreak that could curtail economic expansion in the world’s second-largest economy.
Chinese health officials said the coronavirus — an illness akin to SARS, or severe acute respiratory syndrome — has spread, infecting more than 2,800 people and claiming at least 80 lives around Wuhan city, China, where it reportedly originated.
However, Wilson said that the market’s slump is likely to be limited due to a Federal Reserve that has proven quick to provide liquidity to stalled-out markets as well as ultralow interest rates, which currently stand at a 1.50%-1.75% range. The Fed holds a two-day meeting beginning on Tuesday.
Wilson said he expected the S&P 500, including defensive names, to continue to outperform emerging market assets and small-caps.
The analyst and his research team explain it this way:
While near-term risks have increased, we think that corrections at the index level will be contained to 5 percent or less while the defensive skew outperforms both growth and cyclicals until rates show some signs of actually bottoming or hard data suggests the recovery will be more robust than we currently expect.
Check out the attached chart:
It is important to note that a number of analysts have said that financial markets, which have been trading near all-time highs, remain vulnerable to headlines surrounding the outbreak. Cases have turned up in other countries, including five in the U.S., as well as Japan, Taiwan, South Korea, Singapore and France.
In July of 2018, Wilson accurately predicted that the market would see its largest correction in months, with the rally showing signs of “exhaustion.” He wrote then: “The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February.”
However, his more recent predictions have been less on the mark, which he has acknowledged.