If you asked me to make a list of people the bulls don’t want to hear from now that stocks are sitting at 14-month lows following a truly egregious two-day rout, Donald Trump and Jeff Gundlach would probably be at the top of that list.
But somewhere in the top ten would also be Morgan Stanley’s Mike Wilson, whose July call for an imminent correction in Tech and other market highfliers was borne out in dramatic fashion starting in September.
Regular readers are familiar with Mike. Few took him seriously back on July 8 when, in a short Sunday evening client note, he called for “a proper rain storm” in the market’s richest “zip code”. By “zip code”, Wilson meant Tech and Growth which he called “over-loved and over-owned.”
About three weeks later, a little rain did in fact come calling in the form a sudden lurch lower in FANG following Facebook’s Q2 fumble. After releasing a couple of additional notes reiterating his stormy forecast, Wilson showed up on CNBC in what amounted to a last ditch effort to warn you that if you thought the late July showers were something, you were ill-prepared because the “proper storm” Mike predicted on July 8 was still coming.
Fast forward to December and ol’ Mike is vindicated — and then some. The FANG+ index is (basically) in a bear market and it’s fallen for four consecutive months.
So, what’s Mike up to this week? Well, as it happens, he was out with a new note on Monday and he’s got a lot he wants to discuss.
He kicks things off by noting that this year has been hell. He doesn’t use the word “hell”, but he doesn’t have to, because when you say “opposite of heaven”, it’s pretty clear what you mean.
“If 2017 felt like heaven for equity investors, 2018 was the opposite”, Wilson writes, before suggesting that you might need some time to relax, take a deep breath and ask yourself why you didn’t listen to him back in July. “Hopefully the markets offer a bit of reprieve over the next two weeks – a chance to rest, reflect, and figure out the playbook for 2019.”
Of course Mike’s already got “a playbook for 2019” and it centers around the idea that the environment will remain challenging.
Read highlights from Wilson’s 2019 outlook
Wilson elaborates on a couple of key issues in his Monday note and I’ve got to tell you, the wordplay in the following passage is something that I would have been proud of, and that’s saying something because I’m a guy who is good with words. See if you can spot it:
2019 guidance will be a helpful first look, but ultimately we think the real pressure on growth will materialize during 2019 meaning it may be another quarter or two before we have companies en masse willing to confess and guide lower in line with our expectations.
If you didn’t catch it, read it again. And if you still don’t catch it, so much the worse for you, but congrats to Mike, because that’s a helluva funny double entendre for an equities analyst.
Skipping right along, Wilson reminds you that “China’s impact on markets is about more than just trade.” We expounded on that early Monday in “‘Linked By A Common Thread’: Why One Analyst Isn’t Buying The EM Bull Story For 2019.”
Mike reiterates that recent data out of China has not been encouraging and the growth story there is critical for broader market sentiment. He poses the following series of questions regarding the most recent string of data disappointments emanating from Beijing:
How much was trade related? How far will it go? Are previously announced stimulus measures enough to turn China’s growth around, and if so, by how much?
On the Fed, Wilson is skeptical about the committee’s ability to turn the ship around for beleaguered stocks and ironically, his skepticism stems in part from the fact that the market has already priced out the rate path.
‘With so few hikes priced into 2019 already, we think there is limited scope to surprise the market by being more dovish than expected, and if the Fed does turn out to be more dovish than expected there is a good chance it is because the data is forcing them to be [and] that environment would not be good for equities as returns would suffer before the Fed got more dovish”, Mike cautions, going on to warn that “whether or not a pause/halt is enough to sustainably turn a downtrend in equities is up for debate.”
On the economy, Wilson has a simple message: “PMI Risk – Market Signals Are Clear … Look Out Below”. That might sound hyperbolic to you, but remember, Mike is the guy who told you six months ago to “watch out for [a] proper rain storm” in Tech and Growth and now look at your soaking wet self. Here’s a short excerpt from the section on PMIs:
What caught our eye last week was the dramatic fall in our Morgan Stanley Business Conditions Index which plummeted 21 points to a level of 35 in December, the lowest level since February 2016 (Exhibit 3). This index tends to move coincidentally with PMIs. It’s also the same signal that the relative performance of defensive equites vs. their cyclical counterparts have been sending for some time (Exhibit 4). Both indicators are telling us we may have an imminent collapse in the PMIs when the December data come out in early January.
After a short discussion that finds Wilson comparing the scope of de-rating (i.e., multiple contraction) across sectors, Mike talks a bit about positioning and reiterates all of the things we and plenty of others have documented recently about the rather astonishing de-grossing/de-netting/de-beta’ing that took place during the October drawdown and he also discusses the recent retail exodus.
“It’s fairly amazing how fast sentiment and positioning have changed since the end of September in both the institutional and retail investment communities”, he marvels, on the way to documenting recent trends from the bank’s wealth management unit where he says he’s “rarely seen such high levels of cash.”
The good news is, folks have finally woken up and the concurrent washout/purge might have set us up for a rally. “Our Equity Risk Indicator has been firmly in negative/’fear’ territory now for most of this year”, Mike says, adding that “with both buyside and sellside expectations now more realistic about next year and stock prices reflecting that, we think we are finally setup for a rally, something we have avoided all fall.”
Finally, on page 10, Mike delivers the glorious conclusion which essentially finds him rhetorically asking if you’ll ever doubt him again. To wit:
The bottom line is that many of the things we have been concerned about all year– tightening financial conditions, peaking growth and margin risk– are now more acknowledged by the consensus. We also hear our narrative being bandied around both in the media and from clients. No longer do we get much pushback on our concerns. In fact, many clients are starting to ask us if we’re bearish enough!
Oh, and speaking of “bears”, Wilson wants you to know that none of this – not a single, solitary bit of it – has anything to do with football.
We’ve had a defensive bias for a large part of this year, both in and out of the markets (the best game of the NFL season was the defensive focused Rams-Bears game, not the Madden-esque Rams-Chiefs face off and no, our view is not influenced by our Chicago Bears fanaticism).