‘The Year of the Fed’: Morgan Stanley Says Growth Will Disappoint, Urges Investors to Stay Defensive

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Morgan Stanley’s top strategist Micheal Wilson has once again urged investors to stay defensively positioned as the Q1 earnings season will show the growth deceleration.

Wilson believes that the stock market is sending a clear message to traders: Stay defensive as growth will disappoint. The strategist added that we are facing “a pivotal earnings season.”

“The internal message from stocks is diverging again from bonds and the S&P 500. When that happens we think it pays to follow stocks. Our main takeaway is to stay defensive and be wary of what bonds are really saying about growth. The move looks more technical at this point which tends to exhaust and reverse quickly. Cyclicals look most vulnerable to such a reversal if it happens,” Wilson said in a client note.

On why the S&P 500 is trading less than 10% off the all-time high despite an extremely challenging macro environment, Wilson says that mis-priced yields helped the index to “remain resilient” after ignoring “the growing risk of a more hawkish Fed in the fourth quarter of 2021.”

Wilson argues that the stock market is “the best strategist in the world.”

“On that score, the internals of the stock market are once again diverging from the message from the bond market. More specifically, back end rates have had one of it’s largest 1 month moves in history as Fed funds futures catch up to reality. To be clear, we don’t have a bone to pick with this move higher in rates given the state of inflation and the Fed’s persistent attempt to convince the world they are going to do whatever it takes to quash it. However, we do question the bond market’s apparent view that the Fed can do this much tightening without impacting the economy in such a way that this path for rate hikes will be challenging to complete,” the strategist added.

By Senad Karaahmetovic