“The market is preparing for a bad outcome,” warns Morgan Stanley's Mike Wilson.
In a July 29 note, as the S&P 500 index SPX, +1.21% sat near its record closing high of 3,025.86, Wilson argued that equity markets were stretched to their limits, and S&P would fail to break significantly above 3,000, unable to overcome an area that’s provided stiff resistance since last year. The S&P, Dow Jones Industrial Average DJIA, +1.01% and Nasdaq Composite Index COMP, +1.48% have subsequently pulled back 5.5%, 3.5% and 5.2%, respectively with the S&P sitting at 2888.
“The Fed put basically expired when they cut rates,” he said. “The hope of Fed cuts has been propping up the markets all year, but rate cuts aren’t good for the market if you’re going into recession.” Wilson takes the inversion of various yield curves seriously, but said the most important to look at is the inversion of the yield on the 10-year U.S. Treasury Note TMUBMUSD10Y, +2.17% and the fed-funds rate. The 10-year yield fell below the fed-funds rate in May and the spread between the two has become increasingly negative since.
He pointed to a weak reading of the University of Michigan’s consumer sentiment index, which fell 6.3 points in August relative to July and around 9 points compared with its cycle peak last year, along with data showing that average weekly hours worked has fallen to near two-year lows.
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