Morgan Stanley Issues Major Warning for Stock Investors

Morgan Stanley Issues Major Warning for Stock Investors
Photo (CC BY 2.0) by Alex Proimos on Wikipedia Commons

From Peter Reagan at Birch Gold Group

In 2022, there were several signs that indicated the U.S. was in economic recession.

These signs included (but weren’t limited to): Back-to-back quarters of negative GDP growth, red-hot inflation all year, and major market indices tumbling 10% to 33%. Bonds also had their worst year since before the Civil War.

Despite signals pointing to the U.S. economy slowing in September 2022, it appears that careful massaging of the definition of the word “recession” brushed off the idea it was actually, technically in a recession. (That would be a bad political look, after all!)

Most of the mainstream media played along.

But you know who wasn’t fooled? Well, me, for one – and Morgan Stanley’s top financial experts.

Pay attention – this analysis is based on data, not on hope or wishful thinking…

Morgan Stanley predicts stocks will lose another 22%

While optimistic investors look as though they are grasping at any opportunity to claim the “markets are fine” (like reacting favorably when inflation cools by 0.1% in a month).

Michael Wilson, who is Morgan Stanley’s chief equity strategist, isn’t so optimistic about the markets. According to MarketWatch, he’s the expert who: “correctly predicted the 2022 stock-market selloff, which saw all three major indexes cement their worst annual losses since 2008.”

Wilson suggested:

the S&P 500 could find a bottom around 3,000 points by the end of 2023. The index was trading around 3,919 at last check, according to FactSet.

That’s a 30% drop in stocks. Sound shocking?

Even a 30% drop wouldn’t be enough to return the Shiller PE ratio to its historical average. Right this moment, that would require a 41% plunge.

Sidebar: How did we get here? Wolf Richter explains our current situation in his own uniquely manic style:

The era of money-printing and interest-rate repression in the United States, which started in 2008, gave rise to all kinds of stuff, and the easy money kept going and kept going, and all this money needed to find a place to go, and then money-printing went hog-wild in 2020 and 2021. And the stuff it gave rise to just got bigger and bigger, and crazier and crazier. And much of this stuff is now in the process of coming apart, I mean falling apart…

In other words, as I’ve said before, what goes up must come down. Reversion to the mean is the most powerful force in finance.

A recent Bloomberg article added a crucial piece of context that more optimistic investors seem determined to overlook:

One of the factors driving Wilson’s bearish view is the impact of peaking inflation. US stocks rallied last week amid signs that a modest ebbing in price pressures could give the Federal Reserve room to potentially slow its interest-rate hikes. Wilson, however, warned that while a peak in inflation would support bond markets, “it’s also very negative for profitability.” He still expects margins to continue to disappoint through 2023. [emphasis added]

Wilson’s predictions aren’t new. He’s published two successive articles that projected a grim outlook for stocks this year. The first, from December 14:

We expect corporate sales volumes and pricing power to deteriorate, leading to profit declines, even without a recession, hence our lower earnings estimate of $195 per share for 2023. When we consider factors such as the Purchasing Managers’ Index (PMI) data, the yield curve and correlations between profit growth and the speed of the Fed’s rate hikes, we anticipate that 2023 year-over-year earnings growth will likely be materially negative.

The next and more strident warning appeared on January 5th of this year, starting with the words “Don’t Expect Much from U.S. Stocks.”

The multiple bear-market rallies staged by U.S. stocks throughout 2022 suggest many stock investors haven’t embraced the likelihood of higher-for-longer interest rates and a materially slowing economy, even as economic data and Treasury yields continue to sound warnings.

Here’s why this matters: bear markets cannot end without “capitulation,” which means bulls giving up. Once buyers become pessimistic, prices can return to reality. (Remember, paying 40% over the historic average for stocks, based on fundamentals, is a bet that their value will increase 40% in the near future. It’s not rational! But there’s no mental competency test required to open a brokerage account…)

Wilson continues:

We think U.S. stock investors may be overly optimistic and see two key reasons for concern heading into 2023:

Unattractive valuations: Equity risk premiums – the potential excess returns one can expect for investing in stocks over risk-free bonds – are still relatively low…

Lofty earnings expectations: Consensus 2023 earnings projections for the S&P 500 Index sit around $230, a number that bakes in earnings growth of about 5%. To us, this estimate fails to account for the challenges that companies are likely to face, especially as they start to feel the effect of tighter monetary conditions in earnest. These include lower sales volumes and loss of pricing power, potentially at the same time.

To summarize Wilson’s arguments against a new bull run in stocks:

  • Stocks are already expensive
  • They’re priced for another 5% earnings growth
  • Investors are ignoring both the effects of the Fed’s rate hikes and recession indicators

As Benjamin Graham pointed out in his masterpiece The Intelligent Investor: a stock purchased with the hope that its price will soon rise independent of its dividend-producing ability is a speculation, not an investment.

All speculative bubbles end the same way – in a panic. Until that moment of capitulation and the subsequent rush for the exits, more rational and prudent folks will take a different course.

After reading all this, you might be asking yourself: “How can investors protect their savings from losses if stocks are projected to drop?”

Fortunately, there’s still some time before panic sets in. We don’t know how long we have, and we don’t know how bad it will get. For those of us biding our time, though, there’s some good news on the horizon…

The consensus is in: gold is poised for a great year

Zach Scheidt, editor of Lifetime Income Report, recently put a spotlight on the answer. He thinks gold will have a record year:

I predict that the price of gold will reach $3,000 an ounce within the next year.

He bases this prediction on two factors:

  1. The dollar peaked in September 2022 relative to other currencies, and has since crashed some 11.5%.
  2. Bitcoin (BTC) has crashed since peaking in late 2021, and isn’t stealing gold’s traditional role as a potential safe haven right now.

According to quite a number of analysts and market veterans, gold is poised for a great year (I covered this recently). Here are two highlights:

Ole Hansen, head of commodity strategy at Saxo Bank:

The metal has also been buoyed by the reopening in China with pictures of very crowded gold markets seeing pre-Lunar demand and the PBoC [People’s Bank of China] announcing it bought 62 tons of gold during the last two months of the year.

David Neuhauser, founder and chief investment officer at Livermore Partners:

I think as you look forward, you start to look around and think ‘where is the safest place for your investment in terms of assets?’ and the only place really to go as an alternative now is gold, in terms of knowing that you are not going to see that debasement of your assets. [emphasis added]

So if you’re seeking protection against stock market plunges, especially if you’re nearing retirement (and don’t have time to wait out a long bear market), diversifying your savings with physical gold could be right for you. If you’re curious and want to learn more, we just released an updated version of our free info kit on Precious Metals IRAs right here.

2023, Featured, market bubble, morgan stanley, stock market