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Stocks May Drop 20% as Stimulus Eases, Growth Slows: Morgan Stanley

Stocks could drop 20% as fiscal stimulus is withdrawn and economic growth slows, a Morgan Stanley strategist says.
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The stock market could plunge 20% as fiscal stimulus is withdrawn and economic growth slows, says Morgan Stanley Chief US Equity Strategist Mike Wilson.

“Given the extraordinary fiscal stimulus during this recession, we are concerned that the inevitable deceleration in growth will be much worse than what is currently expected,” he wrote in a commentary cited by CNBC.

“This is the ‘ice’ scenario and would likely lead to a larger-than-normal mid-cycle transition correction in the S&P 500 -- 20%.”

“Ice” refers to his scenario that the market is at a fork in the road between “fire” and “ice.”

Other bearish factors he sees: downward earnings revisions, sluggish consumer confidence and weak purchasing-manager reports, Morgan Stanley said.

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Wilson’s base target for the S&P 500 at year end is 4,000, about 8% below current levels.

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And how should stock investors play this decline?

“We continue to recommend a barbell of more defensively oriented quality (healthcare and staples) to protect from the ‘ice’ scenario, while keeping a leg in financials to participate in the ‘fire’ outcome, as higher rates materialize,” Wilson said.

Other strategists also have predicted a correction in recent days. Binky Chadha, chief global strategist at Deutsche Bank, says stock valuations are quite stretched, and that could mean a rough stumble is in store for the market

The valuations are “historically extreme” in almost any metric, he said in a Sept. 10 commentary cited by MarketWatch. As a result, “With the current cycle advancing very quickly, the risk that the correction is hard is growing,” Chadha said.