If you’re wondering whether Morgan Stanley’s Mike Wilson is prepared to turn bullish on US equities, the answer is “no.”
After a rough couple of weeks, stocks managed to find their footing coming into September, but Wilson, whose bearish inclinations were mostly unbothered by the summer melt-up, isn’t buying it. Figuratively or literally.
His latest update was brief, and served to reinforce his contention from last month that price is now driving sentiment and positioning. “In late cycle environments, it’s very typical for investors to swing back and forth between soft and hard landing outcomes,” he wrote, attributing the see-saw to the difficulty of timing cycle turns.
Wilson complained about breadth, which remains poor. The figures below continue to suggest that this is a market propped up on mega-caps and A.I. beneficiaries, he said.
The annotations on the left-hand chart tell the story: If you use the equal-weighted S&P as a proxy, breadth peaked in February.
At a time when soft landing odds are ostensibly increasing commensurate with better prospects for so-called “immaculate disinflation” in the US, Wilson still worries about a hard stop, or a “Wile E. Coyote” moment, to employ one of this year’s macro memes du jour.
“These periods are elusive right until the moment when activity seems to stop on a dime,” Wilson said Tuesday. “They are also typically accompanied by an ‘event’ that is just too much for the economy to handle in its already weakened state.”
One problem with that thesis is that the US economy isn’t exactly weak (Wilson begs to differ, but that’s another story). Another problem is that equities are trading in a “bad news is good news” environment precisely because the economy is “too” strong. Wilson’s “event” would need to be pretty bad to flip that script. Finally, we’ve had several “events” already including a black swan in the UK government bond market (which nearly collapsed the LDI complex), a string of bank failures in the US and a felled primary dealer (Credit Suisse).
Somewhat ironically, next month is the one-year anniversary of Wilson’s fantastically-timed tactical long call on US shares. That played out to perfection. If only he’d stuck with it past December.
“The rally in some of the major averages over the last few weeks may have investors feeling a bit better again but given the underlying weakness in breadth and in some of the more cyclical parts of the market, we think that optimism should be faded,” he went on. “Potentially softer September and October data is not priced into many stocks and expectations, in our view.”
