Morgan Stanley’s top strategist Mike Wilson wrote in a note this week that stocks have soared too high too fast, and those highs will ultimately prove unsustainable.
Over the last seven weeks, the S&P 500 has climbed about 4.5%, and the Nasdaq 100 has jumped more than 11%.
Wilson illustrated his point by comparing the current enthusiasm to ill-prepared climbers scaling Mount Everest.
“Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote. “This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade.”
Put these 20 books on your Christmas wishlist if you want to understand investing and conquer bear markets, according to top Wall Street experts
1. “The Big Short: Inside the Doomsday Machine” by Michael Lewis
2. “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” by Jeremy Siegel
3. “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
4. “Reminiscences of a Stock Operator” by Edwin Lefèvre
5. “Market Wizards: Interviews with Top Traders” by Jack D. Schwager
6. “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed
7. “The Asian Financial Crisis 1995-98: Birth of the Age of Debt” by Russell Napier
8. “The Black Swan: The Impact of the Highly Improbable” by Nassim Taleb
9. “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” by Burton Malkiel
10. “Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms” by Russell Napier
11. “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger
12. “Debt: The First 5,000 Years” by David Graeber
13. “Stabilizing an Unstable Economy” by Hyman Minsky
14. “Triumph of the Optimists: 101 Years of Global Investment Returns” by Elroy Dimson, Mike Staunton, and Paul Marsh
15. “A Short History of Financial Euphoria” by John Kenneth Galbraith
16. “Too Big To Fail” by Andrew Ross Sorkin
17. “Irrational Exuberance” by Robert J. Shiller
18. “Boom and Bust: A Global History of Financial Bubbles” by John D. Turner and William Quinn
19. “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay
20. “The Dow Jones-Irwin Guide to Modern Portfolio Theory” by Robert Hagin
Wilson has been warning of an earnings recession among US companies for some time, arguing that investors aren’t ready for the inevitable weakness that’s ahead. Inflation, he argues, is eating into profits and that will be on full display in the coming quarters.
January’s inflation reading, among other economic data, showed prices aren’t cooling as fast as the Fed wants, BofA said, which opens the door to more aggressive policy. Add to that a labor market that shows no sign of weakening and a strong US consumer, and the Fed – and therefore the stock market — is looking at a difficult road ahead.
“Payroll, retail sales, inflation; mission very much unaccomplished for Fed despite 450bps tightening,” according to Bank of America.
Investors, meanwhile, are piling into the riskiest, most speculative assets, and that’s going to make an ensuing crash hurt even worse, according to JPMorgan’s Marko Kolanovic.
“There is an old adage ‘don’t fight the Fed,’ but this behavior is not just fighting but also taunting the Fed with crypto, meme stocks, and unprofitable companies responding best to Fed communications,” Kolanovic wrote in a note to clients last week.
So far this year, retail investors are spending a record $1.5 billion per day scooping up stocks, according to Vanda, and Kolanovic likens that to investors daring the central bank to squash still-hot equity prices.
He said the bidding-up of these speculative stocks suggests a bout of massive market volatility could be just around the corner.
The bulls are still out, to be sure. Fundstrat’s Tom Lee, a prominent Wall Street bull, highlighted in a Wednesday note that stocks have remained resilient through past Fed tightening cycles, suggesting that Powell’s aggressive policy doesn’t necessarily foretell a stock crash.
Stocks have posted winning performances in 11 of 14 such cycles since 1970, according to Lee.
“The point is that a tough Fed doesn’t mean stocks need to fall at every hint of an inflation data point,” he wrote. “This means a higher terminal rate is not the death knell for stocks.”