Michael Wilson | Morgan Stanley | Bear market

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Morgan Stanley’s Wilson Says Bear Market Stock Rally Means It’s Time to Buy Bonds

• Morgan Stanley strategist says traders can play December runup
• Advises investors consider order of cash, Treasuries, credit

By

John McCorry and

Jonathan Ferro

 

Morgan Stanley’s Michael Wilson predicted the current bear market rally in US stocks and expects it to last further into December. But he’s telling the average investor to buy bonds. 

“If you think about bear markets that are punctuated by either an economic or earnings recession, we think we will get at least one of those, the earnings recession,” the firm’s chief US equities strategist told Bloomberg Surveillance on Thursday. “The order of operations is very clear. You want to be cash first, then you want to buy Treasuries -- long duration -- then buy credit and buy equities last.”

Traders, on the other hand, may want to ride the wave a while longer. “For a trade, we think it’s Nasdaq or long-duration stocks,” Wilson said. “That’s more speculative. That’s for the trading community. For the investment community and for asset owners, it’s basically bonds.”

Wilson, a Morgan Stanley veteran of 33 years, was right in forecasting the big drop in the S&P 500 this year and in calling for a bear market rally. The rebound took hold in October on anticipation that the Federal Reserve will pause in its path to raise rates and stem inflation.

But Wilson, who’s also the New York-based company’s chief investment officer, still sees a scenario where the index may reach a bottom at 3,000-3,300 points -- at least 19% below current levels -- in the first quarter to first half of 2023. A drop will come with the realization that estimates for US earnings and profit margins are still too high, the strategist said.

Margins are “part of the story we think is underappreciated,” Wilson said. “Inflation is what drove profits higher. As inflation comes down next year -- we have inflation going back toward 2% to 3% by the end of next year -- that’s bad for equities. It’s going to crush margins. Good for bonds, bad for equities.”

“I want to make it clear, it’s still a bear market,” said Wilson, who is ranked the No. 1 strategist in Institutional Investor’s latest survey. “These things are tricky.”