Mike Wilson: Growth Stocks Could Decline 20-30%

On October 10, in an interview with CNBC, Mike Wilson said investors should focus on the fundamental story. He was worried about the expensiveness of growth stocks. On October 11, the Dow Jones Industrial Average Index rose to an intra-day high of $27,013.97. It was around 500 points above the previous day’s closing level. 

Moreover, he showed that we are near the end of the business cycle. A partial trade deal might have increased bullishness in investors. Market participants blame 80% on the trade war and 20% on the business cycle for the current slowdown. However, Morgan Stanley’s chief US equity strategist has opposite thoughts. He emphasized that 80% of the business cycle and 20% of the trade deal could drive the equity market.

Also, economist Robert Shiller and previous Fed governors highlighted long-term challenges for the US economy. Read Robert Shiller Doubts Trump’s Growth Story to know about his views. Trump Can’t Ignore Powell’s ‘As Long as Possible’ Remarks outlines the long-term challenges for the US economy.

Wilson believed few chances for a 20% correction in the equity market. A 20% fall in the Dow Jones Industrial Average from the current level means a fall of 5,363 points. For the S&P 500, it would mean $2,400. When securities fall 20% below its recent highs, bear markets start. In the bear market, security prices continue to be weaker.

But, Wilson expects a possible correction of 10% in the equity market. A 10% fall means the S&P 500 Index could reach below $2,700. Morgan Stanley has a year-end price of $2,700 for the S&P 500 Index. In fact, in the past, Mike Wilson was firm on this target price. Read BofA and Credit Suisse Differ on Equity Market to know experts’ opinion on the S&P 500 Index.

Whatever the possible fall in the S&P 500, the risk will impact only a few areas, suggests Morgan Stanley’s chief equity strategist. Those are the growth stocks. Investors are treating growth stocks as “protective species.”

Moreover, investors have similar sentiments toward defensive stocks. However, the defensive stocks could outperform the market during the slowdown, while “growth stocks generally are cyclical.” Cyclical could fall 20% to 30%, according to the strategist.

In August, the S&P 500 Index has the second-worst decline for 2019. Defensive and high dividend yield sectors like consumer staples and utilities have outperformed other sectors. Oil prices fell with the equity market. The energy sector is cyclical.

Stocks like Apple (AAPL) and Amazon (AMZN) rose 49.7% and 15.3%, respectively, in 2019. In the last trading session, Apple stock prices were at their all-time high. In the US, FAANG stocks are considered growth stocks.  

Mike Wilson said that defensive stocks will remain expensive. Until the market sees a recession coming and a sharp correction in earnings, defensive will continue to outperform. Also, he believes that defensive stocks will be expensive “until the yield curve starts to re-steepen.”

On October 11, the spread between the US 10-year Treasury constant maturity and the three-month Treasury constant maturity turned positive for the first time since May 22. This spread is also known as yield spread. If the yield spread expands rapidly into the positive territory than it will be called “re-steepening of the yield curve.” Re-steepening of the yield curve could indicate the recession is close.

In that period, investors will start selling equities. We might see a sharp decline in the S&P 500 Index and the Dow Jones Industrial Average Index. At that time, the defensive stocks could be “very vulnerable,” according to Wilson.