Morgan Stanley Sees Growing Risk of 20% Drop in S&P 500 By Bloomberg
(Bloomberg) — A plunge of more than 20% in U.S. stocks is looking more like a real possibility, according to Morgan Stanley (NYSE:) strategists led by Michael Wilson.
While it’s still a worst-case scenario, the bank said that evidence is starting to point to weaker growth and falling consumer confidence.
In a note on Monday, the strategists laid out two directions for U.S. markets, which they dubbed as “fire and ice.” In the fire outcome, the more optimistic view, the Federal Reserve pulls away stimulus to keep the economy from running too hot.
“The typical ‘fire’ outcome would lead to a modest and healthy 10% correction in the ,” they wrote.
But it’s the more bearish “ice” scenario that’s gaining traction, the strategists said, laying out a picture in which the economy sharply decelerates and earnings get squeezed.
Global stock markets fell Monday due to concern about the impact of the China Evergrande Group’s debt crisis on the wider financial system. U.S. Futures indicated a drop in value of around 1% on Monday’s market open. Still, the is just about 2% off its all-time highs.
Morgan Stanley, a Wall Street strategist, is less bearish than many, however, their opinions echo those of other banks who have made similar ominous forecasts recently. Strategists at Goldman Sachs Group (NYSE:). and Citigroup (NYSE:) have also written about the potential for negative shocks to end the U.S. market’s relentless rise.
“Will it be fire or ice? We don’t know, but the ice scenario would be worse for markets and we are leaning in that direction,” Morgan Stanley’s strategists wrote. “We think the mid-cycle transition will end with the rolling correction finally hitting the S&P 500.”
The bank recommended investors stick to defensive, quality companies to protect themselves and keep some exposure to financial stocks, which will benefit from rising interest rates.
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