Chief investment officer of Morgan Stanley warns investors to brace for renewed stock market volatility in December following the S&P 500’s nearly 10% surge last month.
Michael Wilson, who held firm on a bearish outlook amid the benchmark’s 20% rebound this year, said in a client note that bond yields and equities could see “near-term volatility” as the calendar flips, temporarily reversing the recent risk-on rotation.
November’s rally, one of the index’s best for that month, has markets overstretched and ripe for a setback, Wilson assessed. The S&P 500 is now confronting an area of technical resistance after its most overbought readings since March’s false breakdown.
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Morgan Stanley CIO says bulls have shown most support
According to Wilson, there is potential for a further market revival in the early months of 2023 given the combination of favorable seasonal tendencies and the well-known January Effect. This time, investor confidence in a Federal Reserve pivot in 2023 might also turn out to be more well-founded.
“This time bulls have shown the most support for their view based on a still healthy macro backdrop,” Wilson wrote. “That would be the most bullish outcome for equities if it were to play out.”
In the coming year, the Morgan Stanley strategist walks a tightrope between reluctant acceptance of receding recessionary fears and contrarian pessimism. Ultimately, peak inflation leading to declining interest rates would trigger the ideal conditions for risk-asset outperformance.
Nevertheless, Wilson cautions that the pivot narrative has misfired repeatedly amid the Fed’s inflation fight. Morgan Stanley advises investors to brace themselves for Fed-induced volatility that will shock both equities and bonds this December rather than pursuing unduly optimistic growth prospects.