CNN Money - Morgan Stanley: We are in a Bear Market!

Article by Matt Egan in CNN Money

Morgan Stanley thinks the bull market is already over -- investors just don't realize it yet.

"We are in a bear market," Morgan Stanley equity strategist Michael Wilson declared in a report to clients on Monday.

Even though the American economy is strong, Wilson argued that the market is sniffing out a sharp deceleration in economic growth and a decline in corporate profits.

"While 2018 is clearly not a year of recession, the market is speaking loudly that bad news is coming," according to Wilson, who has been skeptical about the market for months.

The ominous call comes as Wall Street grapples with another steep selloff. The Dow dropped nearly 400 points on Monday. The Nasdaq plunged 3%.

40% of S&P 500 is already in a bear market

Morgan Stanley noted that more than 40% of the S&P 500 stocks are down at least 20%.

One of the big fears is that the Federal Reserve is raising interest rates more rapidly than the economy can handle. Credit-sensitive parts of the economy, especially autos and housing, have already begun to slow.

Tellingly, the stock market is no longer reflexively bouncing back from declines. In 2018, the S&P 500 has averaged a slight decline on days when the prior weekly return was negative, according to Morgan Stanley. That hasn't happened since 2002.

"The only years the Buy the Dip hasn't worked was during bear markets, or the beginning of one," Wilson wrote.

Investors have dumped individual stocks too, even after companies reported better-than-expected results. That's not a healthy sign.

"In our view, when stocks sell off on good news, that's a bear market," Wilson wrote. Wilson urged clients not to get trapped by fleeting market rebounds.

"This is a bear market" he wrote, "and should be traded as such -- i.e. sell rallies rather than buy dips."

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