Morgan Stanley warns of a “more uncertain and volatile outlook” after Jan. 20.
Investors have greeted Donald Trump’s surprise win with the biggest stock market rally for any new U.S. president. Morgan Stanley is cautioning, however, that his coming inauguration may mark an end to these post-election good times.
The S&P 500 Index jumped 1 percent on Tuesday, pushing its gain since Nov. 8 toward 6 percent, on speculation Trump and policies pushed by the Republican-controlled Congress will boost growth. That’s all well and good, but near-record levels for U.S. stocks already reflect that sentiment, and the start of the Trump administration on Jan. 20 presents as good a time as any to scale back on equity holdings, the bank said.
“After all, what incrementally positive and exciting outcomes could be produced in the first few weeks after that?” the team, led by Chief Equity Strategist Adam Parker, wrote this week. “We can’t help but think that the Republican sweep has created a more uncertain and volatile outlook for the economy and corporate earnings growth.”
While the prospect of less regulation, lower corporate taxes, and a potential tax holiday for overseas earnings has investors speculating that growth is set to accelerate, an accompanying surge in the dollar could crimp exports and force the Federal Reserve to raise interest rates faster than expected, Morgan Stanley suggested.
The bank says the S&P 500 will finish the year at 2,300—just 2 percent above its current level—as corporate profit growth remains vulnerable to the potential for slower expansion in China, fallout from European elections, and the rising dollar. The target is below the average estimate of 2,356 among 15 analysts surveyed by Bloomberg as of Dec. 19.
Other banks are also advising caution. Jefferies Group LLC, which expects the S&P 500 to rise to 2,325 this year, said this week that the bullish call on transportation stocks it made on Nov. 8 is no longer valid. The Dow Jones Transportation Average surged 9 percent after the election through yearend.
“The rally in the transport sector has reflected better sentiment towards the rails as well as the improvement in inventory-to-shipment ratios within the manufactured and wholesale goods area,” Chief Global Equity Strategist Sean Darby wrote. “We are concerned that the strength of the dollar will cause a loss of competitiveness for manufacturing and a loss of pricing power.”
This year’s theme is shaping up to be “uncertainty” as Wall Street analysts are having a particularly hard time making forecasts for the upcoming year, given the transition in Washington.
“We can’t recall a time when a change in leadership in Washington had the potential for such large and diverging effects on the U.S. economy,” Bank of America Corp. analysts said in a recent note. One result: Strategist views are as clustered as they’ve been in 10 years, with the top-to-bottom spread in forecasts for 2017 just 200 index points.
For Morgan Stanley, the market’s next move will be down.
“To us, it is WHEN, not IF we should fade this recent reflation trade,” Parker and his team concluded.
Courtesy of Bloomberg