Fed moves to hike interest rates are leading to a liquidity evaporation—enough so that Morgan Stanley is defying the rest of Wall Street to call a true bear market, warning that the sell-off we’re seeing now won’t be just a blip in the bull run.
As things stand right now, the Dow’s downward slide over the past month should be giving the bulls food for thought. It’s lost 7 percent this month:
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And so should the S&P 500’s:
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This morning, things might be looking a bit better: Tuesday trading has seen the S&P 500 gain some 0.3 percent with consumer staples and utilities stocks giving it a boost to drag the index out of correction mode. The Dow also gained 150 points, largely because of some outperformers with earnings reports: Goldman Sachs, Boeing and McDonald’s. And while FANG stocks are on a losing streak, even the Nasdaq Composite pared some losses with strong showings by Comcast and Intel. Related: Saudi Stocks Plummet As Foreign Investors Bail
But the Dow’s loss of 900 points Monday should be a warning sign.
"The rolling bear market continues to make progress and there is growing evidence that it is morphing into a proper cyclical bear market in the context of a secular bull," wrote Michael Wilson, the bank's chief equity strategist, as reported by CNBC. "We think the evidence is building and the message from Mr. Market is clear: the consensus outlook for earnings growth is too rosy next year."
And Morgan analysts are placing the blame on liquidity thanks to the Fed, which has hiked interest rates three times this year and is widely anticipated to go for another hike in December.
"The markets seem to agree and have been quietly revolting all year," Wilson said. "We don't think the revolts will stop until central banks pause or at least signal they are concerned. With the Fed having to respond to still strong economic data and the desire to remain apolitical, we think it could take another 200 S&P points making 2450 a reasonable downside target to consider."
This is decidedly contrary to how Goldman Sachs views the market right now. Goldman analysts see the October sell-off as presenting an attractive buying opportunity.
From the Goldman perspective, the sell-off will be short-lived and a rebound is in order thanks to share buybacks.
"The recent sell-off has priced too sharp of a near-term growth slowdown," David Kostin, Goldman's chief U.S. equity strategist, said in a note to clients, CNBC reported. "We expect continued economic and earnings growth will support a rebound in the S&P 500."
Goldman is forecasting $1 trillion in total repurchases this year, and has an S&P 500 price target of 2,850.
While a rebound-based-on-buybacks theory is the Wall Street consensus, Morgan Stanley thinks the Fed is the key to market direction right now. And its analysts may end up being vindicated come December, if the Fed goes for another rate hike in the face of mounting criticism of such from Trump.
By David Craggen for Safehaven.com
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