U.S. stocks continued to record high overnight: after the S & P 500 returned to its record high last Friday, it closed at a record high of 3431.28 on August 24; the NASDAQ index closed at a record high of 11379.72.
However, U.S. stocks ignored the recession and set a record high, which also reversed the attitude of Wall Street analysts who had been sentimental before. Michael Wilson, an analyst at Morgan Stanley, was one of them. Michael Wilson has been bullish on U.S. stocks over the past year, believing that the Fed’s massive liquidity and rising inflation will drive the stock market to historical highs.
However, in a research paper on August 24, Michael Wilson reversed his previous bullish attitude, suggesting the risk of a correction in US stocks. Specifically, Michael Wilson said that the market rally led by several technology stocks such as Apple will press the “pause button”. Although Michael Wilson does not believe that the “bull market” of US stocks is over, periodic adjustment is inevitable and will start soon.
“Friday’s price move is probably the most extreme example so far, with volatility continuing to narrow,” said Michael Wilson. So far this year, Apple has contributed 105% to the Nasdaq 100 and S & P 500 and 88% to the Dow Jones industrial average. This week, the standard & Poor’s 500 index rose 72 basis points to an all-time high, while weighted indexes such as the S & P 500 fell 1.5%, nearly 8% below its all-time high in February. “
Corresponding to the algorithm of weighting the S & P 500 index according to the value of the component stock market, each stock has the same weight in the algorithm of the standard & Poor’s 500 index, so the index can eliminate the influence of large technology enterprises such as faamg on the market.
Michael Wilson said that, unlike the market capitalization weighted index, the equal weight S & P index “is still below its June 8 high.”. Market gains are dominated by only a few tech giants, and have been one of the focuses of the rebound on Wall Street. According to Michael Wilson, the breadth of the rally showed a significant improvement in the first few months of the rally after the March low, which is one of the early grounds for our belief that a new bull market is coming. Until recently, in our view, the narrow scope of the rebound was a big worry for the market.
The strategist expects that although US stocks are still at a new cyclical bull market starting point, the concentration of the recent rebound has become higher, indicating that the market rally has come to an end, and a large-scale adjustment is about to come. From the fundamental point of view, there are also three factors to provide “help” for the US stock market callback:
- Uncertainty development of health events in the United States. Due to the rise of health incidents during the students’ return to school, some universities have decided to cancel offline teaching, and many universities have followed suit. “Since we first stressed the lifting of the blockade policy in mid April, this marks a negative development in the situation.”
- The U.S. government remains deadlocked on the next round of fiscal stimulus. Michael Wilson believes that, given that this is a political year in the United States, the stimulus is unlikely to fail, but the market will still respond to the uncertainty in the timing and scale of the stimulus, and many families relying on unemployment benefits may lose confidence in their financial situation.
“Just last week, we saw comments from retailers like Wal mart that showed they were starting to see a slowdown in spending,” said Michael Wilson. Part of the reason for this may be the suspension of welfare measures, as well as the early demand for certain spending categories in the second quarter, when most of the economy was stagnant. This chart from Goldman Sachs shows a sharp decline in mortgage payments. “
- The minutes of the Fed’s July meeting did not provide future policy direction. More specifically, “the guidance of average inflation target (AIT) and yield curve control (YCC) are the main reasons for the disappointment”, which is worrisome, because “the optimism about long-term interest rates (including nominal interest rates and, in particular, real interest rates) is largely based on both approaches taken by the Federal Reserve.” The minutes of the July meeting showed that the Fed was either unprepared or not interested in either.
Looking ahead, Michael Wilson warned that all of these factors will have an impact on the economy as a whole, even apple, which has seen strong gains this year, is no exception. However, the rise in uncertainty is also likely to be good news, because if that happens, “the U.S. government will act quickly and possibly adopt a stimulus plan larger than currently expected. The Treasury will issue more bonds, and the Federal Reserve will launch more quantitative easing policies, and even lead to higher risk prices.
Michael Wilson added that in the event of an unexpected rise in interest rates and the previous disappointment of the market by the Fed’s attitude towards yield curve control, back-end interest rates are likely to rise significantly.
“We expect a return to panic in the coming weeks / months, which could eventually lead to a correction in major US stock indexes,” Morgan Stanley concluded As he pointed out earlier, such a correction could start soon.
On August 24, Apple Inc? AAPL.US ?After hitting a high of $515.14/share, trading volume also declined in recent gains. All this suggests that the market adjustment Michael Wilson expects will come soon.