Stock market’s selloff is only half-done, and final leg will come in 2019, warns Morgan Stanley strategist

Elon Musk’s cringe-inducing Twitter meltdown, the rise and fall of bitcoin, and the record-breaking oil plunge — for some 2018 can’t end soon enough. But be careful for what you wish for as the bear that has rampaged through the stock market is expected to return in the new year, according to one c strategist.

“The Rolling Bear market is now better understood by the consensus; and more importantly, it is better priced, with forward price/earnings falling 18% from peak to trough. In short, while 90% of the price damage has been done by this bear, we’ve likely only served 50% of the time,” said Mike Wilson, an equity strategist at Morgan Stanley, in a note to clients.

Wilson was among the handful of market watchers to predict the recent market wipeout even as stocks were trading at record levels.

The Rolling Bear is tired from all the mauling he has done this year. However, he is likely just resting rather than hibernating,” he said. ”The final leg of this bear likely won’t come until numbers are reduced for 2019, although that should feel a lot less painful than the multiple compression stage we experienced in 2018.

The S&P 500 SPX, +0.14% and the Dow Jones Industrial Average DJIA, +0.46% are poised to close out November in the red as worries about tighter liquidity resulting from the Federal Reserve’s interest-rate hikes and a trade war with China triggered an exodus from stocks.

The strategist predicted a rehash of this year in 2019, forecasting a price target of 2,750 for the S&P 500, with the index likely stuck between 2,650 and 2,800 for the bulk of the time.

2019 likely will be another year of cyclical consolidation in a secular bull market, meaning more range-bound and volatile markets,” he said. “We would not be surprised if the market comes close to both our bull- and bear-case targets during the year, however, with our base case serving as a midpoint for the year rather than an endpoint.

Wilson sees the large-cap index falling as low as 2,400 in a worst-case scenario and rallying to 3,000 if all goes well. Yet, despite his belief that 2019 will feature more of the same from 2018, the issues driving the market will be different.

If this year has been characterized by lower valuations despite strong earnings growth, 2019 is likely to be more about disappointing growth and subdued valuation as the economy slows and inflationary pressure picks up, he said.

We think there is a greater than 50% chance we experience a modest earnings recession in 2019 defined as two quarters of negative year-on-year growth for S&P 500 EPS,” said Wilson.

But some of the sting from disappointing earnings will be offset by the Fed, which is forecast to back off from its hawkish stance and pause its rate-hike campaign by June.

The projection comes as Fed Vice Chairman Richard Clarida on Tuesday confirmed that the central bank will press ahead with gradual rate increases but will remain flexible as “monetary policy is not on a preset course.”

Against this backdrop, Wilson recommended investors focus on value stocks — shares of companies with decent fundamentals that are priced below peers. He also upgraded consumer staples to overweight and noted that his team maintains a “modest” preference for large-cap stocks over small caps.

The stock market finished higher Tuesday as gains in so-called defensive sectors such as utilities and consumer staples offset trade-war jitters.

 

/reuters.com

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