Morgan Stanley strategist Michael Wilson says the Federal Reserves run of interest rate hikes is likely approaching its end. His prediction is notable in that he is a well-known bear who also predicted this year’s stock market slump.
In a note Monday, he pointed out that indicators such as the yield curve inversion between 10-year and three month Treasuries, which has historically predicted recessions with 100% accuracy, “all support a Fed pivot sooner rather than later. Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.”
This week everyone will be looking to the Fed’s policy announcement following their November 1-2 meeting, on Wednesday. It is widely expected that the Fed will issue a fourth consecutive 75 basis point rate hike to the central bank’s key rate. Jerome Powell’s statements will then be parsed for any clues as to future moves by the central bank. Meanwhile investors have parsed economic indicators over the past two weeks, looking for any sign of effects from the Fed’s tightening, producing a rally in the markets.
Wilson noted, “This kind of price action isn’t unusual toward the end of the cycle particularly as the Fed moves closer to the end of its tightening campaign, something we think is approaching,” He went on to predict the rally would continue until there is a more meaningful pullback in the next 12-month earnings per share estimates.
In another note, a team of Goldman Sachs strategists wrote that the coming slowdown in the pace of rate hikes by the Federal Reserve is combining with light positioning and an expectation of strong seasonal performance to lift stocks in recent weeks.
Lead strategist David Kostin wrote, “In 17 bear-market rallies since 1970, the S&P 500 rose by an average of 15% over 44 days.”
Morgan Stanley’s strategists expect that there will be a roughly 6% gain of about 4150 points in the S&P 500 from Friday’s closing in the short term, with a trailing stop-loss level of 3,700. Wilson had predicted last week that the current bear market will end sometime in the first quarter of next year.
Still, there are pessimists. UBS Global Wealth Management says it does not see the Federal Reserve changing tack any time soon, given the persistent nature of the inflation in the US.
Lead strategist Mark Haefele wrote in a note, “We expect the Fed to keep hiking aggressively until the official data shows inflation is receding. Even when the Fed finally does stop raising rates, it’s worth remembering that monetary policy is likely to remain at restrictive levels for some time.”
