Morgan Stanley: Bearish Ahead of CPI — “Bear Market Rally”

Morgan Stanley: Bearish Ahead of CPI — “Bear Market Rally”

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Morgan Stanley CIO and Chief Equity Strategist Mike Wilson gained notoriety last year for his highly bearish take on stocks.

This was at a time where the stock market was at maximum bull mode, with each of the indices at their respective all-time highs. Since then, almost all equities (save for a handful of well-positioned names) are down significantly from those all-time highs.

However, in 2023, stock market bulls have attempted a recovery. The S&P 500 has broken out of the downtrend that it was trapped beneath during the entirety of of 2022. The major index has also achieved something it couldn’t during all last year — rise above its 65-day high. The rally gave way to January 2023 being the best for the stock market in the past 4 years. Now, the “biggest bear on the street” Mike Wilson says it’s time for the bears to take back control.

“Equity risk-reward is as poor as it’s been at any time during this bear market.”

That’s Mike Wilson’s take, according to a note released by Morgan Stanley Monday morning, February 13th. 

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“Client conversation has shifted from ‘how much downside is left?’ to ‘when is that downside coming?’” — Perhaps implying that clients at the highly bearish firm are getting a little antsy as they sit out on the latest market rally. But Morgan Stanley isn’t giving up — Mike Wilson indicated that he believes the time for that downside is now. Why?

“The stock market isn’t accepting likelihood that Fed may remain restrictive.”

Front-end rates are moving higher — but this time stocks aren’t moving in tandem.

This extenuates a phenomenon that began in late 2022 — the decoupling of real rates and stock valuations. From 2017 to present, stock valuations and real rates have been largely in line with one another. When they became decoupled, they snapped back into place rather quickly. Currently, the two data points are separated more than at any time in the past 5 years — save for a brief period during the early days of the COVID-19 pandemic.

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“Equity markets showed some real signs of exhaustion last week.”

Morgan Stanley CIO Mike Wilson believes that Tuesday’s release of the January CPI report could spark a whirlwind of worry for investors as they battle with the concept that the Fed may not be as dovish as the market is giving them credit for — which could be the catalyst that brings these allegedly lofty valuations (currently sitting at about 18X forward EPS) back down to Earth. 

“Could a hotter than expected CPI release this week be what brings these markets back in-line with one another?”

Did 2023 End Mike Wilson’s Hot Streak of Stock Market Predictions?

No one is right all the time. We have to be careful that our biases don’t get ahead of us. For example, while Wilson enjoyed a heyday of accurate predictions throughout 2022, his predictions have fallen flat in 2023. Three weeks ago, following a day where the SPY had closed at $395.88, Wilson told the media, “Don’t let the bear market house of mirrors fool you.” The “house of mirrors” comment was one Wilson originally made on January 17th, with the SPY trading even lower.

Then one week later, on January 30th, with an SPY at $400.58, Wilson was in the headlines once again, to tell investors “that the January rally was set to end that very week.” Today, the SPY rests at $412.52 at the time of writing — more than 4% higher than it was when Wilson called the rally a “bear market house of mirrors.” Quite a lucrative house of mirrors. We won’t have to wait long to find out whether Wilson’s fundamental viewpoint proves accurate — Tuesday’s CPI report releases tomorrow, at 8:30AM EST.

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It’s hard enough predicting the outcome of day-to-day news that hits the market. 

“Will the CPI be hot or cold?” 

“Will Apple beat earnings? Miss? How about guidance?”

It’s even harder predicting how the stock market will react to the news. How many times have we seen the market rally on bad news? 

Instead of trying to “get in ahead of the move” and predict the outcomes of impossible variables, why not trade the momentum instead? For example, imagine that CPI comes in hot, shaking the market to it’s core. Stocks enter freefall. Isn’t it better to take on your bearish position after that bearish activity breaks a crucial stock market support level? 

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