U.S. stock investors should brace for a market that will be paralyzed for several years in a narrow trading range, according to one team of analysts on the Street, and as reported by CNBC. Investors are already in the midst of a "rolling bear market" that will push the S&P 500 down as much as 17% and no higher than 4% from today's levels, Morgan Stanley's chief equity strategist, Michael Wilson, told clients in a recent note.
"We think this 'rolling bear market' has already begun with peak valuations in December and peak sentiment in January," stated Wilson.
What A Rolling Bear Market Looks Like
High: 3000, up 4%
Low: 2,400, down 17%
(For more, see also: Stay in Small Caps Even If Trade Woes Ease: Stifel.)
Earnings Deceleration Caused by Higher Input Prices
Unlike a typical bear market, where stocks fall simultaneously, Morgan Stanley says the "rolling bear market" will rotate from sector to sector and even from stock to stock, as the weakest are hit first and the hardest. As a result, the investment firm indicates that assets like bitcoin, the world's largest cryptocurrency by market capitalization, as well as emerging market debt equities, base metals and homebuilders could prove particularly risky.
He expects the rolling bear market to accelerate as the investors send shares down on weaker than expected earnings, driven by higher supply-side inputs like energy, transports, labor, funding, tariffs and material costs.
"We view the rate of change in earnings growth as one of the most important drivers of equity prices broadly; so our belief that earnings growth is likely to slow more in 2019 than the market anticipates is important for our less optimistic view on equities," wrote Wilson, who is the most bearish strategist tracked in CNBC's regular survey. His June 2019 S&P 500 target of 2,750 implies a 5.2% downside from current levels. At 2,901 as of Thursday morning, the S&P 500 reflects an 8.5% return year-to-date (YTD).
These Rolling Bear Market Sectors Are at Risk
|Emerging Market Debt|
|Emerging Market Equities|
Information Technology Looks Risky
Wilson reiterated a pessimistic outlook for high-flying information technology stocks. "It makes sense to lower broad exposure in the near term as elevated valuations, lack of material earnings upside against expectations, extended positioning, technicals, and trade-related risks all add up to a poor risk reward for the sector in the near term," he wrote.
In May, Morgan Stanley first forecasted the rolling bear market, which it says is now upon us, and recommended stocks that would thrive in this kind of environment. In the report titled, "30 for 2021: Quality stocks for a 3-year holding period," analysts highlighted players such as video game maker Activision Blizzard Inc. (ATVI), financial firms The Charles Schwab Corp. (SCHW), JPMorgan Chase & Co. (JPM) and BNY Mellon (BK), consumer brands leader Constellation Brands Inc. (STZ), and search giant Alphabet Inc. (GOOGL) as safe bets in the rolling bear market. (For more, see also: 8 Stocks to Outperform a 'Rolling Bear Market'.)