Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said the number of stocks supporting the S & P 500’s record high rally was so small that the market was vulnerable to shocks, especially the rise in interest rates.
Wilson pointed out on Friday that Apple’s 5% rise would bring all the upward contributions to the S & P 500 and Nasdaq 100, highlighting the narrowing of the market breadth. Last week, the S & P 500 rose 0.7% to an all-time high, but the index fell by 1.5% if each component had the same weight, indicating that the general component did not rise like the super large cap stocks.
Market imbalances are nothing new – the combined market value of apple and the other four largest stocks is up 49% this year, while the rest of the market is down 4%. Wilson said there was a risk to the rally, which was partly due to bond yields hovering near record lows.
Wilson warned that the recent setback in the school reopening process, as well as potentially disappointing economic data, could force Congress to launch a more than expected stimulus package, which could lead to higher bond yields. “We expect interest rate panic in the next few weeks / months, which could eventually lead to the first tradable correction of major U.S. stock indexes,” he wrote in a report to clients
“Maybe it’s about to start,” he said. Driven by massive fiscal and monetary stimulus, the S & P 500 has risen more than 50% from its bear market low in March.
Although Republicans and Democrats are at a standoff over a new stimulus bill, Wilson said Congress would act quickly and reach an agreement of $2 trillion to $2.5 trillion if the economic restart process stalled. Given the Fed’s lack of willingness to implement yield curve control, the market is not prepared for a “sharp” rise in long-term bond yields due to the Fed’s lack of willingness to implement yield curve control.