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.
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.