I’m Sorry, Wilson!

“I’m sorry, Wilson!” (Who’s seen Cast Away?)

If you’re looking to trade the early-year bullish seasonal in equities, it’d be advisable to wait for “a better entry point later this month.”

That’s according to Morgan Stanley’s Mike Wilson who, as you can imagine, remains relatively bearish on US stocks, with an unchanged year-end 2024 S&P target of 4,500. So, below current spot.

I’ll be as charitable as I can. Last month was an example of why, for the vast majority of investors, trying to trade in and out of markets is a recipe for underperformance. Trying to avoid rough patches invariably means missing out on “unexpected” rallies which, if replicated enough, can severely undermine long-term performance.

Everyone knows that, but (almost) everyone fancies themselves savvy enough to be the exception to the rule. Spoiler alert: Exceptions are so few and so far between they don’t bear mentioning.

Of course, it’s not only bears who advocate (implicitly or explicitly) jumping in and out of markets in a futile quest for glory. Bulls do it too, which is why it was somewhat refreshing to hear Goldman’s David Kostin suggest the best strategy for 2024 might be to simply stay invested.

Anyway, Wilson expects volatility both for equities and rates this month. Stocks, he said, stating the obvious, are reflecting expectations for Fed cuts in 2024. Markets’ conviction in a dovish pivot is the highest it’s been this cycle and traders expect cuts “amid a still healthy macro backdrop,” he went on.

That latter bit is critical. Prior to Chris Waller’s game-changing remarks last week, the idea of Fed cuts absent a meaningful downshift in the economy was still considered somewhat fanciful by those outside the macro-rates space, as one derivatives strategist noted.

Of course, if you listened to Fed officials earlier this year, it was plain they weren’t joking about the possibility of cutting rates as inflation fell. It was clear that at least some key policymakers were convinced of the utility of such cuts, which can be justified by the application of policy rules, with additional air cover from the notion that the full impact of the Fed’s hiking campaign is yet to be felt. Holding terminal for the sake of it with inflation moving lower and the “lags” looming would be unduly obdurate not to mention untenable in an election year.

But, again, that type of thinking is the purview of the macro-rates space. For equities strategists, it was easier to parrot some version of the line that says inflation is still elevated, the Fed’s determined not to repeat the mistakes of the 1970s, the economy is holding up well and therefore rate cuts in the absence of recession are highly unlikely.

To be fair, that was the line Fed officials generally parroted. Talk of insurance cuts was always couched in theoretical terms. Waller’s remarks last week took those cuts out of the realm of theory. He’d surely say he was merely musing about a hypothetical, but his comments were explicit enough that everyone was able to read between the lines.

So, here we are: With bears compelled to reconcile forecasts based, in part anyway, on what now look like misguided assumptions about monetary policy. It’s not that the Fed won’t retain a relatively hawkish bias, and indeed they may well keep rates restrictive in 2024. But the mistake for bears was assuming that “hawkish” and “restrictive” are everywhere and always incompatible with rate cuts.

For what it’s worth, I don’t doubt the idea that stocks might stumble this month or that bond yields might rise coming off November’s dramatic rally. But that won’t make bears right. Barring a total disaster, it’s too late for that in 2023.

The S&P would need to fall 15% in December to reach Wilson’s year-end target, a hypothetical decline that’d dwarf the December 2018 selloff, the worst since the Great Depression and a meltdown Wilson famously called.


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