Market Watch: Prepare for the Biggest Stock-market Selloff in Months, Morgan Stanley Warns
Article by Ryan Vlastelica on Market Watch
The U.S. stock market has been partying all throughout July, and a hangover is coming.
That’s according to analysts at Morgan Stanley, who said that Wall Street’s rally is showing signs of “exhaustion,” and that with major positive catalysts for trading now in the rearview mirror, there’s little that could continue to propel equities higher.
“With Amazon’s strong quarter out of the way, and a very strong 2Q GDP number on the tape, investors were finally faced with the proverbial question of ’what do I have to look forward to now?’ The selling started slowly, built steadily, and left the biggest winners of the year down the most. The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February,” the investment bank wrote to clients.
The decline “could very well have a greater negative impact on the average portfolio if it’s centered on tech, consumer discretionary and small-caps, as we expect.”
“We must admit, the market sent some misleading signals over the last few weeks by limiting the damage to the broad indices when Netflix and Facebook missed. We believe this simply led to an even greater false sense of security in the market,” wrote the team of Morgan Stanley analysts, led by Michael Wilson, the firm’s chief U.S. equity strategist.
The firm forecast “a rolling bear market,” during which “every sector in the S&P 500 has gone through a significant derating” with the exception of tech and consumer discretionary. Those two sectors have contributed the bulk of the market’s advance in 2018; tech has risen 12.5% while the discretionary sector — boosted by Amazon and Netflix, both of which are up more than 50% year-to-date — is up 12.8%.
That these two industry groups haven’t fallen much doesn’t mean they won’t, Morgan Stanley warned.
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