Just Another Bear Market Rally, Morgan Stanley's Wilson Says

Morgan Stanley equity strategist Michael Wilson, who has correctly predicted this year's 20% downdraft in stocks, is now asking if falling yields and lower oil prices are bullish or bearish. Wilson notes while last week the market took a bullish interpretation of this, and he expects this to continue for a few more weeks, the reality of lower earnings will prompt the resumption of the bear market.

"... this recent decline in bond yields has been perceived as positive for equities - ultimately a misread, in our view," Wison commented. "For this read to continue to hold, we'd likely need to see a continuation of falling yields in the context of cresting inflation pressures, an associated less hawkish Fed policy path, more durable economic growth than we expect and a re-acceleration in earnings revisions. The combination of those factors is feasible, but is not likely, in our view. Thus, we see the recent rebound in equities as another bear market rally that could rise another 5-7% in the best case scenario."

Wilson notes the S&P 500 is trading back at 16.3x or 1 turn higher than where it was trading at the prior week's lows. He said this is hard to justify given the growing concern about earnings.

"As a result, we continue to believe any near term rally is nothing more than a bear market bounce with lower lows ahead," he added. "The only question is whether we have a soft landing (base case) in which the S&P 500 bottoms near 3400-3500 or we have a recession (bear case) in which the index falls toward 3000."

By StreetInsider.com Staff

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