Don’t expect stocks to rebound if inflation anxiety continues, according to Morgan Stanley.
With price fears egging on Treasury rates, equities could be in for a disappointing few months as investors move away from a “buy-the-dip” mentality.
“When inflation is very low, rising inflation has a positive impact on equity valuations,” wrote Mike Wilson, chief investment officer at Morgan Stanley. But “rising inflation expectation may no longer be a positive for stocks, especially if markets start to think inflation is coming ‘unhinged.'”
Stocks are in the middle of a sizable sell-off with the Dow Jones industrial average falling more than 450 points Monday, adding to a 3.5 percent decline the previous week. The S&P 500 fell 1.6 percent on the week’s first day of trade, as the Cboe volatility index (VIX) — considered the market’s best fear gauge — hit multi-year highs.
Many strategists have hypothesized that the sell-off is the result of several months of uninterrupted gains for equity markets, a correction to overpriced stocks and inflated assets. And with the yield on the 10-year Treasury note climbing roughly 40 basis points since the start of the year, investors may be in for a bumpy ride.
For his part, Wilson is the single most bearish strategist on Wall Street, with a year-end S&P 500 target of 2,750, just 1 percent above its current level. He believes it may be time to shift equity exposure toward defensive stocks and away from cyclical sectors like technology.