Demand for risk assets is growing with each new day not only in the forex market only but also in the stock market. At the moment of writing, the S&P 500 was trading above the monthly high of $4,000. However, Morgan Stanley's strategist says investors should resist putting their money in stocks in spite of a jump in prices after the Fed's rate hike.
Mike Wilson, Chief US Equity Strategist and Chief Investment Officer for Morgan Stanley, says Wall Street's excitement over the idea that rate increases may slow sooner than expected is premature. "The market always rallies once the Fed stops hiking until the recession begins. It's unlikely there's going to be much of a gap this time between the end of the Fed hiking campaign and the recession," he said in a CNBC interview. "Ultimately, this will be a trap."
Buying stocks now, investors will have to sit out the moment when companies face real issues due to high inflation, which, based on Q2 reports, start to arise. The first signs of a recession in the United States are evident, and yesterday's data on Q2 GDP, which showed a slowdown in economic activity in the country, confirms that. Consumers will unlikely be happy to know that prices keep accelerating.
The main issues are now the effects of an economic slowdown on corporate earnings and the risks of the Fed's over-tightening."The market has been a bit stronger than you would have thought given the growth signals have been consistently negative. Even the bond market is now starting to buy into the fact that the Fed is probably going to go too far and drive us into recession," Wilson said. The analyst sees the S&P 500 at $3,900 by the end of the year, one of the lowest and most realistic forecasts on Wall Street. That implies a 3% fall from Wednesday's close and a 19% decline from the January high.
Wilson says it is important to wait for another plunge in the market before getting to the bottom. He expects the S&P 500 to drop below the 52-week low of $3,636, hit last month.
"We're getting close to the end. I mean this bear market has been going on for a while. But the problem is it won't quit, and we need to have that final move, and I don't think the June low is the final move," the strategists said. Wilson suggests the S&P 500 could fall to $3,000 by the fall of this year if the US enters a recession.
Yesterday, buyers hit new swing highs. They are now ready to consolidate there and extend growth. Bulls will try to regain control over the $4,122 range, with the target standing at $4,157 resistance. Should the index advance to $4,197, bearish sentiment will get stronger. Some market players may well try to take profit on long positions. A more distant target is seen at $4,234. If pressure mounts due to disappointing corporate earnings and macro results in the US, bulls will have to defend $4,090 support. In case of a breakout, the index could plummet to $4,065 and $4,038, or even to $4,003. Bullish activity is likely to increase near $3,968.
