(Bloomberg) - Morgan Stanley’s Mike Wilson, a stock-market bear who predicted this year’s selloff, isn’t yet ready to join the growing chorus of prominent Wall Street voices saying a US recession is inevitable.
“It’s not our base case, it’s our bear case,” the firm’s chief US equity strategist told Bloomberg Television Thursday. “We’re still not quite there yet.”
Earlier this week, delegates at the second annual Qatar Economic Forum, from Tesla Inc. Chief Executive Officer Elon Musk and Nouriel Roubini to Atlas Merchant Capital’s Bob Diamond, warned the world’s largest economy was heading toward a recession. And Jamie Dimon, who runs JPMorgan Chase & Co., told investors in early June to prepare for a “hurricane” as the US struggles against an unprecedented combination of challenges.
“No doubt the downside case has increased in probability,” he said Thursday, referring to the odds of a recession. “It’s probably something like 50% for the base case, 35% for the bear case, and 15% for the bull case. The bull case is really this Goldilocks outcome that seems unlikely.”
Read: Deutsche Bank, Citi See 50% Recession Chance as Rates Rise
Wilson recently said that the rout in US stocks has left them more fairly priced, but the S&P 500 would need to drop to about 3,000 points to fully reflect the effect of an economic contraction, should one occur. That would imply a slide of about 20% from Wednesday’s close of 3,759.89.
While a drop to that level would anticipate a “mild recession,” some financial conditions continue to support the economy, according to the strategist.
“The banking system is very secure,” he said. “There’s a lot of capital out there, even in corporates. The consumer balance sheet is in decent shape.”
Top strategists at Societe Generale SA and Goldman Sachs Group Inc. have also recently warned of more declines ahead as equities have yet to price in the risk of an economic contraction.
“We want to be investing into the price damage,” Wilson said. “But we think it’s premature if the risk of recession is still increasing. As we move further away from 3,500, the risk-reward is pretty poor. We’re trying to thread a needle here. We’re never going to call the bottom exactly.”
Investors may want to look for “stocks that not only have seen the price degradation, but also have seen the earnings come down,” Wilson said. “We want to see both. The third factor is they have to be profitable. This era of paying up for profitless growth, that’s a trend that’s not going to come back in favor.”
By John McCorry and Alix Steel
June 23, 2022
