Stock market’s post-Fed rebound is a ‘trap’, Morgan Stanley’s Mike Wilson warns

“In the end, it will be a trap.”


— Mike Wilson, Chief US Equity Strategist and CIO, Morgan Stanley

Morgan Stanley’s Mike Wilson, who correctly called the stock market slump in 2022, isn’t convinced the lows are being reached after major U.S. indexes posted a big gain following the Federal Reserve’s decision Wednesday to raise rates an additional 75 basis points, or three-quarters of a percentage point, from 2.25% to 2.5%.

The Nasdaq Composite COMP,
+1.08%
jumped more than 4% on Wednesday, while the Dow Jones Industrial Average DJIA,
+1.03%
jumped 436 points, or 1.4%, and the S&P 500 SPX,
+1.21%
advanced by 2.6%.

Investors found reason to cheer after Fed Chairman Jerome Powell said that while another 75 basis point move in September was possible, the decision would depend on upcoming economic data. While Powell asserted that the Fed would reduce stubbornly high inflation and the economy should see below-trend growth, traders saw prospects for the Fed to slow the pace of rate hikes and no reason to change their views. expectations for the federal funds rate to eventually top somewhere south of 3.5%.

Lily: Was the Fed’s Powell dovish or not? 4 key takeaways from Wednesday’s press conference.

Shares faltered in early trading on Thursday, but ended with another round of strong gains as investors digested a second-quarter gross domestic product estimate that showed the U.S. economy contracted to a annual rate of 0.9%. This follows a 1.6% contraction in the first three months of the year and highlights fears of a sharp slowdown in economic growth and the potential for recession, but also served to bolster expectations. that the Fed will slow the pace of tightening soon, analysts said.

See: US economy shrinks in second quarter, GDP shows, prompting talk of recession

Stocks fell sharply in 2022, with the S&P 500 and Nasdaq entering bear markets, as the Fed moved to aggressively hike rates in its effort to contain inflation. However, Wednesday’s jump was in line with the pattern seen the previous three days when the Fed made rate hikes in 2022. These jumps were often followed by pullbacks.

Wilson, in an interview with CNBC Wednesday night, said expectations that the pace of rate hikes will slow are premature. Wilson echoed a warning from a note released earlier this week, in which he argued that a past pattern that saw stocks rally between a final Fed rate hike and the start of a recession might not be in play in the current cycle. That’s because the Fed could find itself continuing to raise interest rates in the midst of a recession as it tries to get inflation under control.

Wilson has a year-end target of 3,900 for the S&P 500, about 3% below Wednesday’s end. He also warned that the S&P 500 could hit 2022 lows near 3,636 set in mid-June and could drop as low as 3,000 if a recession sets in.

The bear market may be “nearing the end,” but it needs to have “that last move, and I don’t think the June low is the last move,” he told CNBC.

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