Don’t Buy the Rally, Says Morgan Stanley’s Mike Wilson

Morgan Stanley's Mike Wilson, perhaps the market's biggest bear.

Stocks ripped higher again today as Big Tech rallied. The Dow, S&P, and Nasdaq Composite all enjoyed major gains while yields also climbed. China reopening optimism launched Tesla (NASDAQ: TSLA) and Apple (NASDAQ: AAPL) shares alongside major semiconductor names, lifting the general market. Advanced Micro Devices (NASDAQ: AMD) rallied as much as 8.5% on the day.

But today’s gains weren’t limited to just tech. A Sunday report from the Wall Street Journal (from who else but Fed mouthpiece Nick Timiraos) had bulls buzzing heading into this morning’s session.

“At the coming meeting, officials could deliberate two important questions: How long does it take for the full effects of the Fed’s rate rises to influence hiring and overall economic demand? And how much could inflation slow due to other factors such as easing supply-chain bottlenecks or lower costs of fuel and other commodities?” wrote Timiraos.

“Some could call for delaying any pause if the economy doesn’t weaken much in the months ahead. They think the time between when the Fed raises rates and when they slow the economy is relatively short and the economy will soon feel the worst of any policy-induced slowdown.”

He continued, adding:

“Others could argue for a somewhat earlier pause, believing the effects take longer to play out or could be more potent.”

In other words, Timiraos says a spring pause in hikes is potentially on the table if inflation abates.

He also explained that the Fed is focusing more on prices related to labor-intensive services – that excludes food, energy, shelter, and goods – which officials believe could be an indicator of whether rising wages are being passed on to consumers.

Try telling that to the families who insist their grocery bills have mushroomed more than the 11.8% year-over-year inflation reported in last month’s CPI numbers.

Nonetheless, the mere mention of a hike pause has investors wondering if it’s time to buy again.

“With investors growing more confident on the inflation side, it is clear they are now looking beyond the current hiking cycle, to an eventual pause and potentially even cuts down the line,” explained Deutsche Bank strategist Henry Allen.

“But with investors now priced for good news on inflation, the risk is that if inflation does prove more persistent, then we could be in another bear market rally just as we saw last summer.”

Morgan Stanley’s resident perma-bear (and one of Wall Street’s most accurate analysts last year) Mike Wilson warned traders not to get overly excited by the market’s recent rally.

“Our view has not changed as we expect the path of earnings in the US to disappoint both consensus expectations and current valuations,” he wrote in a Sunday note to clients.

“The rally this year has been led by low-quality and heavily shorted stocks. It’s also witnessed a strong move in cyclical stocks relative to defensives. It’s simply a matter of timing and magnitude. We advise investors to stay focused on fundamentals and ignore the false signals and misleading reflections in this bear market hall of mirrors.”

Today, the rally was led by Big Tech. But will the enthusiasm last? Nearly every tech stock now looks overbought in the short term. When (not if) that bullish appetite fades, a wicked correction could be waiting on the other side.

All while earnings continue to roll in ahead of the next Fed meeting (February 2nd), which presents markets with yet another “make or break” moment.


Please enter your comment!
Please enter your name here