Market Watch: It is Time to Dismount from this Stock-market Rodeo, Says Morgan Stanley

January 28, 2019

Article by Sue Chang in Wall Street Journal Market Watch

Timing is everything and Morgan Stanley’s chief equity strategist Mike Wilson is telling investors that they need to get out of stocks right now even if the market still has some upside potential.

Employing a rodeo metaphor, Wilson on Monday urged his clients to “dismount” as the market’s rally since late 2018 is starting to look precarious.

“Maybe the bull ride since Dec. 24 has not gone a full ‘8 seconds’ but we’d look to dismount anyway—we’re close enough and bulls can be dangerous animals,” he said in a report, referring to the number of seconds a bull rider is required to stay on to earn a score for a ride.

Indeed, the strategist said the market’s action has been a “short and volatile ride” since the December plunge and the sell signals aren’t as obvious as from when the S&P 500 traded above 2,900 but it is time to look for greener pastures.

“We struggle to see the upside in hanging on just to see how long we can. We think it is better to hop off now and rest up for the next rodeo,” said Wilson.

Since the bottom fell out of the market on Dec. 24, marking the worst Christmas Eve losses for stocks on record, equity indexes have rebounded, with all major benchmarks bouncing, led by the Nasdaq Composite Index which is up more than 6% this year.

However, Wilson isn’t convinced that the momentum will last as he believes double-digit profit growth is being fueled by lower taxes and lower expectations, setting up for a tougher comparison going forward. In fact, he is projecting earnings per share, or EPS, to grow between 1.3% to 3.5% in the first three quarters of 2019.

Meanwhile, he cautioned that the economy, which had provided a positive backdrop for stocks for several years running, may never fully recover from the partial government shutdown, which coincided with a rise in inventories.

“We doubt a three week reopening of the government is going to lead to a full rebound of economic activity that was lost or suppressed. Some things likely can’t be ‘made up’ even if the temporary reopening become permanent,” he said.  The five-week closure has cost the economy about $11 billion according to the Congressional Budget Office.

Economists at Bank of America Merrill Lynch recently warned that prolonged tensions with China will hurt the U.S. economy and lowered their GDP growth outlook for 2019 to 2.5% from 2.7%. Ethan Harris, global economist at Bank of America, also said China may be slowing faster than expected and its policy makers have not been able to “catch up to the policy shocks.”

To read this article in Wall Street Journal Market Watch in its entirety, click here.

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