Morgan Stanley: equity market correction completed by only 50%

Elon Musk’s cringe-inducing Twitter meltdown, the rise and fall of bitcoin, and the record-breaking oil plunge — for some 2018 can’t end soon enough. But be careful for what you wish for as the bear that has rampaged through the stock market is expected to return in the new year, according to one Wall Street strategist.

“The Rolling Bear market is now better understood by the consensus; and more importantly, it is better priced, with forward price/earnings falling 18% from peak to trough. In short, while 90% of the price damage has been done by this bear, we’ve likely only served 50% of the time,” said Mike Wilson, an equity strategist at Morgan Stanley, in a note to clients.

The strategist predicted a rehash of this year in 2019, forecasting a price target of 2,750 for the S&P 500, with the index likely stuck between 2,650 and 2,800 for the bulk of the year. Wilson said he sees the large-cap index falling as low as 2,400 in a worst-case scenario and rallying to 3,000 if all goes well. Yet, despite Wilson’s belief that 2019 will feature more of the same from 2018, the issues driving the market will be different. If this year has been characterized by lower valuations despite strong earnings growth, 2019 is likely to be more about disappointing growth and subdued valuation as the economy slows and inflationary pressure picks up, he said.

The projection comes as Fed Vice Chairman Richard Clarida on Tuesday confirmed that the central bank will press ahead with gradual rate increases but will remain flexible as “monetary policy is not on a preset course.” Against this backdrop, Wilson recommended investors focus on value stocks — shares of companies with decent fundamentals that are priced below peers. He also upgraded consumer staples to overweight and noted that his team maintains a “modest” preference for large-cap stocks over small caps.