Foundation of US stock markets fragile, says Morgan Stanley; broader-market correction may be coming

US stock markets are at all-time highs but Morgan Stanely’s Chief Investment Officer and Chief US Equity Strategist, Mike Wilson finds the current investment landscape very similar to 2018 while warning of a broader market correction. “In today’s situation, we see several specific reasons for the bad breadth that need to be reconciled or else the broader market will likely stumble,” he said. Wall Street equity indices have been soaring higher and have set new all-time highs repeatedly this year. The recent upward trajectory of indices has been helped by a largescale vaccination drive and the re-opening of the economy. 

While drawing an analogy between 2018 and the current market situation, Mike Wilson highlighted that global money supply growth is decelerating and asset markets are experiencing a rolling correction with the most speculative assets down as much as 50% from their highs. “In fact, we’ve never witnessed breadth this weak with major indices at all-time highs. What this means is that the foundation of the market is fragile,” he added. In 2018 the weakness in market breadth forced a 20% correction in S&P 500 during the last quarter. 

At this Juncture, Morgan Stanley’s equity strategist said there is a potential payback on demand from last year’s surge in spending from extraordinary fiscal stimulus. During the pandemic, the US government handed out massive stimulus cheques to the people. “In the absence of another stimulus, it seems likely growth will decelerate sharply and even disappoint what are now very high expectations, especially in areas like consumer discretionary and technology,” Mike Wilson said. 

Further, the proposed tax increases at the corporate and consumer level is expected further hit the market. Other reasons for bad market breadth include the fear of the spreading delta variant across the globe, the unwinding of monetary stimulus by the US Federal Reserve and other central banks. 

“The good news is that many stocks have already started to discount these risks, hence the bad breadth. The bad news is that it also signals a broader market correction is still in front of us this summer or the fall,” Mike Wilson added. Analysts at Morgan Stanley advise investors to be patient in putting new money to work and remain more conservative with investments until a buying opportunity arrives.