As one of Wall Street’s most pessimistic strategists, Morgan Stanley’s Michael Wilson has not changed his views despite the recent surge in US stocks. He recently stated that with the volatility of US bond yields, the US stock market will end this year’s trend with turbulence after a significant rebound in November.
Despite the S&P 500 index rising nearly 20% this year, Wilson remains bearish. In a report on Monday, he wrote that December may bring “short-term volatility in yields and stocks,” followed by more constructive seasonal trends and the so-called “January effect” which may support the stock market next month. The January effect is a common phenomenon analyzed from a statistical perspective regarding stock market trends, indicating that returns in January are often positive.
The US stock market continued its upward trend from November last week, with the S&P 500 index closing at a new high for 2023 on Friday, with a monthly increase of up to 9%. One factor driving the rise in the US stock market is that bond investors have begun to believe that the Federal Reserve has completed rate hikes and may start cutting rates in Q1 2024.
However, this also puts the S&P 500 index into overbought territory, which is usually considered as a precursor to selling.
Wilson stated that although investors have priced in policy shifts by the Federal Reserve multiple times over the past year, this time they have shown “the greatest support” because they expect it to work within a “still healthy macro backdrop.” The strategist wrote that this situation would be “the most optimistic outcome for stocks.”
Wilson expects the S&P 500 index to reach around 4500 points by late 2024, about 2% lower than current levels. Other Wall Street forecasters are optimistic about next year’s prospects for the US stock market; forecasts from Bank of America Securities, Deutsche Bank AG and Royal Bank of Canada Capital Markets show that the S&P 500 index will reach new historical highs next year.
Focus
Currently, investors are paying attention to factors that may affect the stock market in the coming weeks. The US non-farm payroll report scheduled for release on Friday may support some people’s views that economic cooling will prevent further rate hikes by the Federal Reserve and may relax monetary policy earlier than expected.
Other potential driving factors include the monetary policy meeting of the Federal Reserve scheduled for December 12-13, end-of-year tax loss selling, and seasonal factors such as the so-called Santa Claus rally. In addition, geopolitical risks should not be ignored.
The Pentagon stated last Sunday that a US destroyer and three commercial ships operating in the Red Sea were attacked by drones and ballistic missiles, marking an escalation of military attacks on vessels operating in this area over several weeks.
These developments could intensify concerns that Israel’s war with Hamas could escalate into a broader conflict involving regional countries such as the United States and Iran.
Quincy Krosby, Chief Global Strategist at LPL Financial, said that an expansion of conflicts could prompt some investors to take profits from recent stock market gains. “The market is sensitive to any expansion of this conflict. I believe if it is a harbinger of a deeper military conflict involving the United States, then active fund managers are more likely to lock in their gains.”
Phil Orlando, Chief Equity Market Strategist at Federated Hermes believes that escalating tensions in the Middle East region could push WTI crude oil prices up to $80-90 per barrel and cause a drop of “one to two hundred points” in the S&P 500 index.