The recent stock market has been dominated by the situation in Russia and Ukraine, but as the biggest bear analyst on Wall Street, Michael Wilson, chief stock strategist at Morgan Stanley, believes that the market is very much like 2018, when the US economic growth slows down, the United The prospect of raising interest rates is the most important issue for investors.
Wilson pointed out that no one can really predict the changes in the situation in Russia and Ukraine. Although the future of this risk event is still uncertain, the market has already priced in the past few weeks, but what will probably not change here is that the stock market will continue to face uncertainty. The downtrend will be ugly.
Wilson emphasized that this has nothing to do with geopolitical vagaries, but with an economic slowdown and increased risk.
Economic slowdown will hit U.S. stocks
Since a year ago, Wilson has been using the confrontation of “ice and fire” to illustrate the development of the stock market. “Given the extraordinary fiscal stimulus during this recession, we fear that the inevitable slowdown in growth will be much worse than currently anticipated,” he said.
Wilson predicts that from now on, the magnitude and duration of the correction in U.S. stocks will depend primarily on the extent of the economic slowdown in the first half of 2022, rather than geopolitics. As inflation remains high and consumer confidence remains subdued, economic growth will be lower than expected.
While retail sales and credit card data remained strong, Wilson countered that most of Morgan Stanley’s leading indicators already point to a higher-than-normal risk of a spending slowdown. At the same time, supply is on the rise and demand is also at risk if the improved supply shows that the number of double orders is much higher than business expectations.
That, combined with a potential energy price shock from Ukraine, will only make things worse, he said.
A repeat of the 2018 correction?
In the end, Wilson believes that the current situation looks similar to that of the end of 2018, with the most obvious similarity being that the Fed will be too hawkish at a time when U.S. economic growth is slowing. In September 2018, markets discussed Powell’s claim that rate hikes were “on autopilot” and argued that policy was still far from neutral, especially amid turmoil in credit markets in December.
This time around, the Fed is dealing with record high inflation and arguably trailing the U.S. Treasury yield curve, Wilson noted. So it’s hard to argue that such aggressive rate hike plans are wrong, but it could mean they’re really on autopilot this time around, so it might be hard to re-steer.
In other words, Wilson said, “the odds are increasing that we end up with a similar outcome to what we did in December 2018,” when stocks fell as much as 20% from their highs and then rebounded sharply as the Fed capitulated.