January’s rally hasn’t been strong enough to turn Morgan Stanley’s chief equity strategist Mike Wilson any more bullish. In fact, he’s calling bulls “dangerous animals” and asking bull riders to “dismount.”
Wilson, who called 2018’s rolling bear market, hasn’t changed his bearish stance even after the S&P 500 posted a 6 percent gain in just four weeks in the new year. The mixed signals from the earnings season, a drag from the government shutdown, and limited impact from the Federal Reserve are just some of the reasons Wilson predicts the rally to be short-lived.
“We’ve gotten close enough on a bull that is becoming increasingly dangerous and we struggle to see the upside in hanging on just to see how long we can. We think it is better to hop off now and rest up for the next rodeo,” Wilson said in a note on Monday.
Wilson, among Wall Street’s most bearish, has been calling for an earnings recession in 2019 since early December, while many other analysts now believe the plunge last year was an overreaction to recession fears and trade tensions. The S&P 500 is now up more than 10 percent from its worst Christmas Eve ever driven by upbeat earnings, but at the same time, the valuation is much less attractive and there’s little catalyst insight to drive the market higher.
“Earnings have been limping in over a lowered bar. Double digit EPS growth may seem healthy, but 4Q18 growth is being propped up by lower taxes y/y, meaning fundamental results are already decelerating quickly with harder comparisons ahead,” Wilson pointed out.
Morgan Stanley is also skeptical of a pickup in the U.S. economic data given the loss during the government shutdown and the recent drop in consumer and business confidence.
“We remain skeptical of and think that further weakening may be at best a governor and at worst, a drag on equities. It’s important to recognize that expansions are built on animal spirits and the recent extreme drops in some of the key business and consumer confidence measures are noteworthy and could have much further to fall given their still historically high readings,” Wilson said.
President Donald Trump announced an agreement to reopen the government for three weeks on Friday, ending the longest U.S. funding lapse ever. However, the impasse is expected to be costly as Morgan Stanley lowered its growth forecast for 1Q GDP from 2.5 percent to 1.7 percent.
“Some things likely can’t be ‘made-up’ even if the temporary re-opening become permanent. Inventory builds are likely an additional drag on economic data, and earnings, growth,” Wilson said.
Fed officials are reportedly nearing a decision on when to end the balance sheet reduction, which could be a help to the market. But Morgan Stanley said while bullish, the central bank’s effect will take some time to play out.
“Tapering still means tightening, just less of it, so equity market impacts may be muted. The more fundamental impact will take time to evolve as its primary impact on equities is via a portfolio rebalancing channel that is difficult to predict the timing of with any certainty,” Wilson said.
The Fed will meet on Tuesday to discuss monetary policy. The central bank began the balance sheet roll-off in October 2017 after it had reached more than $4.5 trillion, adding to market pressure stemming from a series of rate hikes.
