With risk sentiment seemingly reinvigorated thanks to a combination of factors including the December jobs blowout, Jerome Powell’s newfound penchant for believability when it comes to contending that the Fed is “feeling the market” and the persistent, low drumbeat of ostensibly positive trade headlines, it’s time to bring in Morgan Stanley’s Mike Wilson.
That’s not a name any bullish investors want to hear. Mike, you’re reminded, was the “man with the plan” (as it were) vis-à-vis the Q4 selloff in Tech and Growth, which Wilson dubbed the market’s most expensive “zip codes” in an infamous July 8 note calling for a “proper rain storm.”
Suffice to say it was one helluva downpour.
Just about the only thing that went “wrong” for Mike Wilson in the back half of 2018 was that as it turns out, he wasn’t bearish enough – a hilarious turn of events given how skeptical everyone was of his relative bearishness in July.
In any event, when last we checked in on Wilson, he was busy reiterating his warning that 2019 could see “en masse” guide downs. He also warned that Morgan Stanley’s Business Conditions Index “tends to move coincidentally with PMIs” and that wasn’t a good thing in December.
“Both indicators are telling us we may have an imminent collapse in the PMIs when the December data come out in early January”, he wrote, more than a month ago. Fast forward to last Thursday and we got the biggest MoM drop in the ISM manufacturing index since 2008.
Well, Mike is back with a new note and before the optimists among you go jumping off any bridges, it’s not overtly bearish, although it’s not bullish either.
Wilson starts by reminding everyone that when it comes to the fundamental problems plaguing sentiment, the fact that there’s a “9” where the “8” used to be on your calendar is wholly meaningless.
“As we entered the new year, most commentators and investors were still trying to look through a bullish lens, hoping the turn of the calendar would finally unleash the positive catalyst they had been looking for”, he writes, before throwing cold water on everyone by noting that “the problem with that approach is that nothing really changes with the fundamentals when the calendar year flips [and] many of the things we (and the market) have been worried about have yet to be fully revealed.”
That said, markets have clearly started to price in many of the concerns Wilson has been flagging for months and indeed, if you go by Wilson’s year-end 2018 S&P target (which was 2,750) you could certainly argue that some risk assets have actually overshot to the downside.
And so, Wilson is cautiously optimistic, even as he isn’t yet convinced that this is the time to jump in. “Given the volatile end to 2018, we find ourselves contemplating if our concerns have been priced”, he writes, before adding the following:
We are definitely more constructive than we have been in over a year based on valuation, sentiment, and positioning, but we don’t think it is time to blow the all clear signal yet. Before making the call for the market to move sustainably higher, we think there are still a few more hurdles to clear. Ultimately, we expect a very important cyclical low to this bear market to be put in this year and we expect a reversal of our Rolling Bear Market to occur in a First-in, First-out (FIFO) manner with the weakest links bottoming first and leading. Therefore, Cyclicals should lead the way once the market finally troughs.
The overarching point from Mike is that his celebrated (although “celebrated” might be the wrong word) “rolling bear market” call has largely played out – just not at the single-stock level.
At the index level, the picture looks like this (the below is just the de-rating across regional benchmarks):
Clearly, index-level bets are safer now than they were, but Mike thinks there are likely more guide downs to come.
“We’re comfortable saying the rolling bear market is now complete at the index and sector level, but we think there is still idiosyncratic risk at the stock level for valuations to come down further or earnings to be cut more than what is already priced”, he writes, before flagging the Apple example and warning that he “suspects there are more ‘Apples’ looming out there as we enter 4Q earnings season.”
Wilson takes a moment to flag the PMI print noted above, tying it in with Apple’s “shock” guidance cut and noting that if you ask him, the selloff last Thursday was more about Apple than about ISM.
As far as signs of an imminent turnaround, Mike points to some of the things we mentioned on Monday, on the way to describing the character of the post-Christmas Eve “massacre” bounce. To wit:
What really caught our eye on the first few trading days of the year was that deeply cyclical sectors and stocks outperformed, and have continued to do so since the “Christmas Eve Massacre.” This internal relative strength of Cyclicals versus Defensives is supportive of our view that we are actually getting closer to a trough, just as the consensus is finally recognizing that growth may be slowing more than they thought.
Finally, Mike reiterates that you can’t sound the all-clear just yet. Financial conditions are still tightening and the news flow that bears have been expecting since last summer is now starting to come through (maybe you noticed).
Wilson thinks you can expect more bombshells like the lackluster ISM print and the Apple guide down in the months ahead and as far as the Fed goes, he’s looking for the same thing we’re looking for – namely concrete signs that the committee is set to do a “hard stop” (as it were) or better yet, tweak the balance sheet runoff plan.
We’ll leave you with one final quote from the note:
The bottom line is the overall market will have a hard time bottoming until the earnings revision breadth bottoms. This will likely keep things choppy and volatile and may even lead to an eventual re-test and break of the lows we saw on December 24th.
Oh, and remember: none of the above is in any way, shape or form “influenced” by Mike’s self-professed “Chicago Bears fanaticism“, ok?!!
Read highlights from Wilson’s 2019 outlook