Listen, Morgan Stanley’s Michael Wilson is pretty pleased with himself when it comes to pseudo-calling the FANG+ correction, ok?
We covered Morgan’s original call when it hit back on July 9, and at the time, it only seemed notable for the quality prose.
Just to kind of review, on July 8, in a short “Sunday Start” piece called “Unsettled Weather”, Wilson regaled clients with a bit of color about “steamy” holidays and “epic thunderstorms”.
“The summer moved into full swing this past week in the United States with one of the steamiest July 4th’s I can remember”, Wilson mused, adding that “popup thunderstorms have been epic lately, dropping as much as five inches of rain in just ten minutes near my house on Tuesday afternoon.”
Apparently, Wilson lives in the Amazon rainforest.
No, but seriously, there was market parallel in his missive and regular readers know I’m a guy who likes vignettes and anecdotes, so I appreciated ol’ Mike’s effort to make an otherwise dry market call into something a little more … errr … wet?
“This reminds me of how markets have traded so far this year – unannounced storms that do a lot of localized damage over a very short span but end almost as quickly as they arrive”, Wilson continued, before getting to the point, which was this:
We think the risk is rising that US tech and growth stocks will get wet. While we are not worried about an economic recession as the catalyst for underperformance in these market leaders like it was back in early 2016, we do think that 2Q earnings season will bring an inevitable acknowledgement from companies that trade tensions increase. The risk to forward earnings estimates, even if managements don’t formally lower the bar. Throw in the fact that these stocks have rarely, if ever, been so over-loved and over-owned, and the risk of a proper rain storm in this zip code increases significantly. We are downgrading our view on the US technology sector to underweight from equal-weight.
It took a few weeks, but the FANG+ index would ultimately careen into correction territory following the Facebook debacle. It’s since bounced a bit, but the point is, Morgan Stanley’s call looks prescient in retrospect.
To be sure, Wilson wasn’t the only one warning about FANG and its ilk prior to the recent correction. For instance, BofAML’s Michael Hartnett has expressed his concerns and according to the bank’s Global Fund Manager survey (which gets a lot of play in the financial news media and also in the blogosphere) “Long FAANG+ BAT” was the most crowded trade on the planet in July for the sixth month running and the most crowded trade outright since “Long USD” in December of 2015.
Additionally, it’s probably time to bail on a trade when USA Today goes all-in, which is what happened with FANG a month (to the day) prior to Morgan Stanley’s call.
"Nailed it". pic.twitter.com/hsHLkRHvmV
— Walter White (@heisenbergrpt) July 31, 2018
Anyway, on Monday of this week, Morgan Stanley was back out with what amounted to a victory lap, that found Wilson calling for a continued rotation into defensives. There’s more on that here, but suffice to say this was the passage that grabbed headlines:
However, by Friday, the market appeared finally exhausted. With Amazon’s strong quarter out of the way, and a very strong 2Q GDP number on the tape, investors were finally faced with the proverbial question of “what do I have to look forward to now?” The selling started slowly, built steadily, and left the biggest winners of the year down the most. The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February. However, it could very well have a greater negative impact on the average portfolio if it’s centered on Tech, Consumer Discretionary and small caps, as we expect.
Well, if you’re the kind of gal/guy who needs to hear it straight from Wilson himself, he showed up on CNBC Thursday to talk about the call. Amusingly, the network treated his appearance like some kind of scoop. Check out this billing they gave it:
“The Nasdaq could correct by 15 percent plus, the S&P 500 probably goes down about 10 [percent],” Morgan Stanley’s chief U.S. equity strategist Michael Wilson said Thursday.
His comments came on CNBC’s “Trading Nation,” where he was speaking publicly on Monday’s correction warning research note for the first time.
“Speaking publicly for the first time” – you’d think Mike was in the witness protection program for daring to call for a tech correction and agreed to speak to CNBC exclusively provided they guarantee his safety. Here’s the clip:
There you go. Congrats to Mike on his fifteen minutes this week and here’s hoping his thesis is borne out if for no other reason than to shake the tree a bit in a trade that’s become dangerously overstretched.