Where is the stock market going from here after the worst drop since 1987? Here’s what the analyst who called the 2018 rout says

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Michael Wilson, chief U.S. equities strategist at Morgan Stanley, said it may be time to pull back on equities after the stock market plunged into a bear market with the biggest one-day drop since 1987 crash.

“We are now trading slightly below our bearish scenario on the S&P 500 and believe it is time to start increasing equity risk for longer-term investors,” Wilson-led analysts wrote in a note from Thursday.


“We are now trading slightly below our bearish scenario on the S&P 500 and believe it is time to start increasing equity risk for longer term investors.”


– The team of Michael Wilson and Morgan Stanley

Strategists said that based on their analysis, the recent decline in the S&P 500 SPX,
+ 0.81%
of its February 19 peak is exaggerated and represents an outlier that could indicate an opportunity for investors (see table attached):

Source: Morgan Stanley


Thursday, the S&P 500 and the Dow Jones Industrial Average DJIA,
+ 0.65%
recorded their largest single-day percentage decline since the crash of October 19, 1987 – and the S&P 500 and the Nasdaq Composite COMP,
+ 1.19%
joined the Dow Jones in bearish market territory, generally defined as a decline of at least 20% from a recent peak.

The drop in major stock indexes comes as fears of the coronavirus and other nervousness, including the CL00 of crude oil,
-2.58%
This week’s precipitous fall and uncertainties surrounding the 2020 US presidential election have ended a record 11-year bull run for stocks.

Wilson and his company said a recession is more likely because the outbreak of COVID-19, the infectious disease that originated in Wuhan, China late last year and has spread to more than 100 countries around the world, has all but shut down major industries, including airlines and cruise lines, and threatens to cause shocks in other sectors of the national economy.

Wilson had previously said that a recession could produce the kind of load shedding that would allow a new rally.

“I’m in favor of a recession in some ways because that’s what would kick off in terms of expectations that have yet to happen,” he said in October.

In Thursday’s memo, Wilson said that “price action and our conversations with investors suggest that the market is clearly heading towards a baseline scenario of a recession in the United States, but liquidity and momentum is positioning played a major role in accelerating the decline in our opinion “.

“The end of this cyclical bull market which we believe began in 2018 was accentuated by liquidity-induced foam following the expansion of the Fed’s balance sheet last year,” analysts wrote. Morgan Stanley.

In July 2018, Wilson accurately predicted that the market would experience its biggest correction in months, with the rally showing signs of “exhaustion.” He then wrote: “The bottom line for us is that we believe the sale has just started and that this correction will be the biggest since the one we experienced in February. “

Wilson says he expects any recession to be short-lived and sees a baseline scenario for the S&P 500 to hit a year-end target of 2,750.

“The Fed’s action is likely to be imminent, swift and substantial. While that does not prevent a recession, it is part of the lowering process, especially if fiscal policy stems from multiple regions of the world, ”Morgan Stanley analysts wrote Thursday.

The investment bank said it had recommended defensive positioning for the past 18 months, but did not expect a recession to happen as quickly as it likely will now due to recent shocks catalyzed by the viral epidemic.

Investment banks say the sectors that tend to perform best after a recession are health care and consumer staples stocks. See the table below for more details:

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