In a recent strategy note Morgan Stanley’s equity team says it is too early to purchase stocks. According to their analysts the risks remain too numerous to ride the recent uptrend in stocks. They say we are tracking the 1994 and 2004 recoveries and the two years suffered through several quarters of range-bound and lower prices. Both years, the market stumbled as investors tried to digest the beginning of the Fed’s tightening.
As we’ve previously mentioned, MS believes the global tightening phase has already started (see here). MS says this is creating a “growth scare” that could eventually result in a double dip. All of this is creating a high level of uncertainty that will keep the market under wraps. They believe the uncertainty will last for several more months or quarters and ultimately result in a better buying opportunity.
“Fundamental headwinds remain from policymakers shifting to tightening mode, moderating growth prospects and higher uncertainty generally (including sovereign concerns). We would like to wait for more clarity on these issues e.g. an easing in Asian inflation fears, a change in Fed language being out of the way and some re-basing in growth expectations. We will keep in mind the key 1994/2004 levels on growth indicators such as negative readings on the ECRI and earnings revisions or a 10-15 point correction in ISM new orders.”