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Morgan Stanley's Shalett Sees Stocks Correcting 10%-15% by Year-End

'The markets are priced for perfection and vulnerable,' Morgan Stanley Wealth Management CIO Lisa Shalett says.

After soaring for the past year, U.S. stocks will likely correct -- to the tune of 10% to 15% -- before year-end, says Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management.

“Major US equity indexes worked their way upward through August and the first few days of September, dismissing resurgent Covid-19 hospitalizations, plummeting consumer confidence, higher interest rates and significant geopolitical shifts,” she wrote in a commentary.

“Instead, investors appear to put their faith in the Federal Reserve’s abilities to achieve unprecedented policy goals.”

The S&P 500 index has climbed 32% in the past year, 18% in the past six months, 7% in the past three months and 2% in the past month.

“To be sure, [Morgan Stanley’s Global Investment Committee] is sanguine about the economic outlook,” Shalett said.

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“The issue is that the markets are priced for perfection and vulnerable, especially since there hasn’t been a correction greater than 10% since the March 2020 low. The GIC expects a pullback of 10% to 15% before the end of the year.”

So what’s an investor to do?

“Consider taking profits in index funds and rebalancing portfolios toward high-quality cyclicals, especially financials,” Shalett wrote. “Also seek consistent dividend payers in consumer services, consumer staples and health care.”

Not everyone is looking to the downside for stocks. Barclays strategists, led by managing director Maneesh Deshpande, have raised their year-end estimate for the S&P 500 to 4,600 from 4,400.

Strong earnings will buoy the market, they said, according to the MarketWatch.