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Morgan Stanley: 'Winter is Here' for Stocks

Investors should 'hunker down for a few more months,' the bank's strategists said. The S&P 500 could fall another 10%.
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The stock market’s tumble likely will continue, with the S&P 500 vulnerable to another 10% drop, Michael Wilson, Morgan Stanley’s chief U.S. equity strategist said Monday.

The market’s attention will shift from Federal Reserve tightening, which is now “well understood and appreciated,” to slowing U.S. economic growth, he said. And that will weigh on stocks.

“We have been monitoring PMIs [purchasing manager indices] and earnings revisions breadth for signs the slowdown is bottoming, but it has quite a bit further to go, in our view, and equity markets are not yet priced for it,” Wilson said. “It’s too early to get bullish.”

Indeed, “winter is here,” Wilson said. “The damage under the surface has been enormous and even catastrophic for many individual stocks.” Investors should “hunker down for a few more months,” he said.

“The Fed is serious about fighting inflation, and it’s unlikely that it will be turning dovish anytime soon given the seriousness of these economic threats and the political support to take action.”

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The market consensus is that the Fed will raise interest rates four times this year, beginning in March.

“As we move into a slower demand/growth environment and supply starts to pick up, we

think discounting is likely to return to many industries,” Wilson said.

“This is why we are most bearish on consumer goods or areas of the economy where there has been overconsumption: apparel, housing-related, some parts of technology.”

Wilson likes defensive and value stocks, including financials, energy and consumer staples.