Top Morgan Stanley Strategist Says Stocks Are Ripe for Relief Rally, but Warns of Coming Bear Market

A trader stands outside the New York Stock Exchange in New York on Sept. 23, 2022. Mary Altaffer/AP Photo

A top Morgan Stanley strategist said that Wall Street is ripe for a short-term rally before falling deeper into a bear market.

Shares in U.S based companies have been struggling since the start of the year, with the S&P 500 index on the verge of witnessing its biggest annual decline since the 2008 financial crisis.

The index has fallen 25 percent since the beginning of the year, according to Bloomberg, in a note by Morgan Stanley strategist, Michael J. Wilson on Oct. 17.

Wilson has long been one of Wall Street’s bearish voices and was one of the first to predict the rough markets this year.

He said that the S&P 500 still has a “serious floor of support” in its 200-week moving average, giving it a chance to rally in the absence of a massive sell-off.

The strategist said that he “would not rule out” a market recovery of about 4,150 points, 16 percent higher than last week’s closing.

“While that seems like an awfully big move, it would be in line with bear market rallies this year and prior ones,” according to Wilson, who said that he still stands by his long-term negative stance on stocks.

Fears of Serious Recession

Investors are increasingly worried that high inflation combined with aggressive Federal Reserve rate policies and declining growth, will push the economy into a serious recession.

Fed Chairman Jerome Powell said that the central bank cannot risk cutting interest rates prematurely, as that may lead to inflation becoming entrenched even further, MarketWatch reported.

Traders work on the floor at the New York Stock Exchange in New York on Oct. 4, 2022. Seth Wenig/AP Photo

The economy is already in a technical recession according to official government figures, after U.S. gross domestic product contracted in the first half of the year.

Wilson told Marketwatch in early October that it was too late to avert an earnings recession, which is defined as two-quarters of negative earnings growth for the S&P 500.

U.S. job figures remain strong, and unemployment rates are still at an all-time low amid a tight labor market.

Bear Markets and Rallies

The core consumer price index (CPI), which excludes food and energy costs, increased 6.6 percent from a year ago, the highest level since 1982, according to Labor Department data released on Oct. 13.

The core CPI climbed 0.6 percent for a second consecutive month.

This jump is solidifying predictions of another aggressive Fed rate hike at its next meeting in November.

However, in his note to investors, Wilson said he believes inflation has reached its peak and “could fall rapidly next year,” but he expects “an acute and material earnings deceleration” over the next 12 months.

The strategist also warned that although it normally takes a “full-blown recession” for the S&P 500 to fall below the key 200-week moving average, if the index fails to hold at that level this time around, the predicted market rally may fail to materialize.

The benchmark could instead tumble to 3,400 points or lower, about 5 percent from the close at the end of last week, but Wilson sees the bear market bottoming at around 3,000 to 3,200 points, according to Bloomberg.

A central bank policy change might also be enough to induce a sharp but short-lived stock rally, Wilson told MarketWatch, as the market is likely to continue heading downward until a Fed pivot finally arrives.

A sign is displayed on the Morgan Stanley building in New York, on July 16, 2018. Lucas Jackson/Reuters

Meanwhile, Morgan Stanley, like the other major financial institutions, is facing the specter of job cuts due to a failing market.

Morgan Stanley CEO James Gorman said the investment bank is looking for ways to reduce costs toward the end of the year while it sails into an expected economic slowdown.

“Obviously we’re looking at headcount,” said Gorman on a conference call with analysts, according to Marketwatch.

“You’ve got to take into account the rate of growth we’ve had until the last few years, and we’ve learned some things during COVID about how we can operate more efficiently.”

Morgan Stanley ended the third-quarter of 2022 with 81,567 personnel, up from 78,386 in the second quarter and 73,620 in the third-quarter of 2021.

“We want to provide growth opportunities across the platform, but we’ve also identified some efficiencies, so over time, that will become clearer,” Gorman said.