Morgan Stanley Strategist Says Bank Stress Signals Bear Market End

(Bloomberg) — Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be a painful and “vicious” start of an end to the bear market in US stocks.

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“With the back-stopping of bank deposits by the Fed/FDIC, many equity investors are asking if this is another form of QE and therefore ‘risk on,”’ the strategist — who correctly predicted the selloff in stocks last year and rebound in October — wrote in a note. “We argue it’s not, and instead represents the beginning of the end of the bear market as falling credit availability squeezes growth out of the economy.”

The S&P 500 will remain unattractive until equity risk premium climbs to as high as 400 basis points from the current 230 level, according to Wilson who is known for being one of Wall Street’s staunchest bears.

“The last part of the bear can be vicious and highly correlated,” he said. “Prices fall sharply via an equity risk premium spike that is very hard to prevent or defend in one’s portfolio.”

The collapse of Silicon Valley Bank and selloff in Credit Suisse Group AG shares have fueled concerns about the health of the global financial system this month, roiling markets. US futures were steady on Monday as investors assessed the impact of UBS Group AG agreeing to buy Credit Suisse and looked forward to Wednesday’s Federal Reserve rates decision.

READ: The One Big Winner and Many Losers of UBS’s Credit Suisse Rescue

“This is exactly how bear markets end — an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time,” Wilson wrote.

The ongoing turmoil in the banking system should lead investors to focus on the deteriorating growth outlook amid restrictive credit conditions, according to Wilson. “The events of the past week mean that credit availability is decreasing for a wide swath of the economy, which may be the catalyst that finally convinces market participants that earnings estimates are too high,” he wrote, adding that the risk of a credit crunch has increased materially.

READ: From Bear Stearns to Credit Suisse: Crises, Mergers and Bailouts

Wilson expects analysts to slash expectations as the reporting season approaches while corporates prepare to lower guidance in a notable way, he said.

The strategist recommends positioning in defensive, low-beta sectors and stocks, while cautioning against the view that mega-cap technology shares are immune to growth concerns.

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