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Morgan Stanley Wealth Management: Worst Soon Comes to Stocks

Majority of investors now look for solace among the wave of the market sell-offs. They contend that the S&P 500 (the Standard & Poor’s 500) already fell 9% from its all-time highs during September – indeed, a devastating decline. But the statistic covers the truth that it is already in a bear market.  Now, according to Morgan Stanley’s Weekly Warm-Up report, it will go more downside sooner.

Bank analysts wrote, “Not only does the price action this year suggest we are in the midst of a bear market—more than 40% of the stocks in the S&P 500 are down at least 20% — but it also trades like a bear market.” Most companies also saw their stock records to sell off, which is a big sign of the market being in bear territory. The bottom line as per Morgan Stanley is that “the technical damage is irrefutable.”

According to Morgan Stanley Stocks could fall because:

  1. Future earnings are estimated to fall distinctly
  2. Stock growth faced huge downward corrections
  3. Nasdaq and Russell 2000 broke 200-day moving standard
  4. Specific stocks and indexes hold risks ahead of them

Elaborating further

Stocks have weakened and gone down on previous levels. Looking through 12-month earnings ratios, S&P 500 fell 18% from its peak December last year. That represents 90% of valuation damage on the current bear market. Extra damages come from the declines in stocks with relatively high price multiples.

While price valuations cost bottoming, it doesn’t mean prices of stocks will. Estimated earnings are expected to go down and that stocks will soon to follow (possibly precipitously in 2019). Morgan Stanley stated, “obviously the bigger cuts, the bigger the risk at both the index and stock level.” Starting the month of October, consensus indicated a 1.2% down for S&P 500. Among the sectors seen a huge decline in consensus 2019 are EPS-growth figures Communication Services at -4.2%, Consumer Discretionary at -2.3%, and Materials at -3.3%.

Other bearish signals according to Morgan Stanley include the price for S&P 500, Nasdaq, and Russell 2000. Morgan Stanley analysts said that they “have definitively broken the 200-day moving average which is now a downtrend.” Whenever those trend lines broke, they usually take some time to turn up again. That means investors have to remain patient and to consider selling the rallies rather buying the dips.

During this year 2018, buying of stocks on the dips failed. Morgan Stanley explained, “a buy-the-dip strategy has not worked this year, the first time since 2002.” Purchasing dip worked well in 2008-2009 crises due to the Federal Reserve’s pumping of major stimulus within the financial system in order to make it alive.

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