Despite this week’s rise in the overall stock market largely based on the U.S. government stimulus package, Morgan Stanley’s team looked at recession factors and how and the economy may bounce back. The bottom line is they believe investors might be wise to buy some stock.
Looking beyond the coronavirus, Mike Wilson, Morgan Stanley’s chief equity strategist and chief investment officer, wrote Wednesday, “Price action and our conversations with investors suggest that the market is clearly moving toward a base case of a U.S. recession. However, a flight to liquidity combined with institutional positioning dynamics played a major role in accelerating the move lower.”
He notes that both legislation and Fed action will take time to “ripple through the system.” But “markets are now trading slightly below our downside case on the S&P 500; given the accelerated move lower, we believe that longer-term investors might start to consider adding to equity risk.”
One point made was that institutional investor leverage was building during the previous low-volatility period but due to the recent coronavirus market drop, those investors were forced to unwind, pushing the market lower. “Within that context,” Wilson said, “the velocity of the recent market drop is understandable, even if it came sooner than expected, due to the shocks from the outbreak and oil price war.”
Wilson sees that a recession would be short-lived, and Morgan Stanley still projects a 2,750 level for the S&P 500 by year’s end. For those investors with a six- to 12-month time horizon, he says that 2,550-2,600 would be a good buy-in point. (The index closed Friday at 2,631, up 6%.)
He doesn’t advise that investors add to positions in early-rebounding sectors, such as Discretionary, but says “that moment may be closer than some investors expect. Equity (and bond) markets have been discounting this environment for some time, which leads us to believe that we are now at a very good entry point for many stocks, including several of the major indices, such as the S&P 500.”
— Related on ThinkAdvisor: