Rally will fizzle out in a week or two, Morgan Stanley strategist Wilson says

You’d probably not expect the bearish strategist Mike Wilson of Morgan Stanley to be impressed, and guess what, he wasn’t.

“We think last week’s rally in stocks was mainly a function of the fall in back-end Treasury yields,” says Wilson. And that drop, he said, was driven more by lower-than-expected coupon issuance and weaker economic data than anything Jerome Powell said. Continuing claims are now up more than 35% from the cycle trough, and the unemployment rate is up 0.5% from its lows, which have been important thresholds in past cycles.

Wilson notes that earnings revision breadth is still in negative territory. “This year’s earnings recession continues to play out, particularly at the stock level. This is one key reason why broader indices and the average stock’s performance within the S&P 500 have been weaker this year,” he says. And the weak economic data only bolster the bank’s view that the earnings recession is not yet over.

So what happens now? For asset owners and allocations, the prospect of adding additional risk at current levels is less attractive than fixed-income alternatives. “We think this group is more likely to be sellers into strength at this point,” he says.

In all, Wilson says the rally should “fizzle out over the next week or two” as it becomes clear the growth picture doesn’t support either Fed cuts or a significant acceleration in earnings per share growth.

Bolstering the view on the Fed side — Barclays is still calling for another Fed rate hike, though in January instead of December.

The market

After the biggest week for the S&P 500
SPX
in close to a year, a gain of 5.9%, U.S. stock futures
ES00,
+0.14%

NQ00,
+0.14%
nudged higher. The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was rising again. Crude-oil futures
CL.1,
+1.24%
traded higher.

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The buzz

Berkshire Hathaway
BRK.B,
+0.80%
released results over the weekend that showed the Warren Buffett-run company with a $157 billion cash pile.

Tesla
TSLA,
+0.66%
CEO Elon Musk reportedly told staffers in Germany the vehicle maker will produce a low-cost car there.

South Korea reinstated a short-selling ban, sending shares of companies including Posco
005490,
+19.18%

PKX,
+3.47%
higher. The iShares MSCI South Korea ETF
EWY
rose 6%.

The Fed’s senior loan officer survey comes out at 2 p.m. Lisa Cook, a Fed governor, is due to speak at 11 a.m.

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The chart

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