What Investors Need to Know About Morgan Stanley’s Correction Prediction

What Investors Need to Know About Morgan Stanley’s Correction Prediction

Posted On October 28, 2020 12:02 pm

I think we can all agree it’s been a wild year for stocks.

The unprecedented locking down of most of the world’s economy in early 2020 resulted in the fastest bear market in history, a stunning 34% decline in the S&P 500. While a 34% bear market is hardly unprecedented, it’s actually about average for bear markets since 1945, those declines normally take 12 months, and this one took just one.

That was, of course, followed by the sharpest bear market rally in history, triggered by record stimulus from Congress and the Fed, as well as a stronger than expected economic rebound as states reopened. But alas, the pandemic that started this wild market ride, is back with a vengeance. And now Morgan Stanley, one of the 16 most accurate economic teams in the world, is out with a potentially frightening prophecy, right in time for Halloween.

Let’s take a look at why one of the most respected economists and asset managers now thinks another stock market correction is not just possible, but the most likely outcome.

More importantly, discover the most effective ways to not just protect your portfolio from the likely coming market pain, but actually how to profit from it when the bulls finally start charging down Wall Street once more.

Morgan Stanley Thinks a Correction is Coming Soon

“The S&P 500 is likely to see a 10% correction in the near term before the bull market continues, according to Morgan Stanley’s chief investment officer.

“With so many uncertainties over the next month, we think another 10% correction from Monday’s highs is the most likely outcome in the near term before this bull market can resume,” Mike Wilson, also Morgan Stanley’s chief US equity strategist, wrote in a Monday note.

The benchmark index saw its first 10% correction in the new bull market in September — after breaking 3,500, it quickly retreated, Wilson said. Last week, the S&P 500 attempted to break through 3,550 but failed, a sign that the correction that began in September is not over, he said.” – Business Insider (emphasis added)

While no economist or asset management team has a crystal ball, Morgan Stanley is among the 16 most accurate economist teams in the world, and so it’s well worth considering the warning about high short-term volatility that Mr. Wilson is warning about. What kind of uncertainty is likely to drive stocks down 10% from here, to about a 12% total decline from September 12th lows?

“Wilson added that the lack of a fiscal stimulus deal, uncertainty about the outcome and timing of the election, and another wave of coronavirus cases were headwinds to higher stock prices in the near term. Going into any pullbacks, investors should look to reallocate their portfolios toward stocks that will benefit from the reopening of the economy, the investment chief said.” – Business Insider (emphasis added)

The Pandemic is Ramping Up Again

US virus cases have been surging in the last few weeks, exactly as leading health experts had warned was likely. The 7-day average is 70,000 daily cases, and on October 23rd we hit 85,000, smashing the previous record of 72,000 set back in mid-July.

What’s causing the third wave of the virus in the US? According to Dr. Michael Osterholm, director of the Centers for Infectious Disease Research & Policy (CIDRAP) at the University of Minnesota, the same factors that are causing the global third wave

  • states eased restrictions
  • individuals became tired of following social distancing
  • more people spend times indoors, in large gatherings
  • lower humidity air during the fall/winter (virus travels further due to smaller droplets that don’t fall to the ground as fast)

The Institute for Health Metrics & Evaluation or IHME at the University of Washington expects that the third wave will peak in terms of new daily cases around the end of the year. Daily deaths are expected to peak two to three weeks later. How bad could things get? Dr. Anthony Fauci told the Senate back in July that he wouldn’t be surprised to see 100,000 + daily cases in the US were an estimated 10% of the population has been infected so far. It takes 60% to 70% immunity to slow the spread of the virus so America has plenty of kindling left for the corona fire to continue burning red hot for several months.

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Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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