Morgan Stanley issues dire warning to investors who ‘followed prices to dizzying heights’

US stocks have risen to unsustainably high levels and face almost certain losses once investors realize the Federal Reserve is unlikely to budge later this year, according to a group of Wall Street strategists.

Morgan Stanley chief US equity strategist Michael Wilson issued a note this week arguing that the market has entered a level called the “death zone,” which in mountaineering is the term used to describe an altitude so high that climbers can’t get enough oxygen. .

“Whether by choice or necessity, investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to escalate into a region they know not to go and cannot live a long time,” he wrote to investors

Morgan Stanley adviser Michael Wilson said the potentially fatal rise out of the ‘death zone’ has been caused by the ‘pursuit of ultimate greed’

‘Many deaths in high-altitude mountaineering have been caused by the death zone, either directly from loss of vital functions or indirectly from wrong decisions made under stress or physical debilitation leading to accidents.

“This is a perfect analogy for where equity investors are today and, frankly, where they have been many times over the past decade.

“Time to head back to base camp before the next earnings guide,” he continued.

Wilson blamed the continued ‘rise’, which could end in catastrophe, on the ‘pursuit of ultimate greed’.

He suggested that the S&P 500 could drop as much as 3,000 points in the coming months, down 26 percent from its current position. Although, for the moment, the index is still up 6 percent from the beginning of 2023.

That forecast comes after a tumultuous year for the stock market, during which all three major indexes returned significant value.

The Dow Jones Industrial Average ended 2022 down 8.8 percent, while the S&P lost nearly 20 percent of its value, and the technology-heavy Nasdaq Composite fell 33.1 percent.

Stocks have had a moderate upward swing so far this year, although some stocks are beginning to stall as the Federal Reserve plans to raise rates again.

A trader on the floor of the New York Stock Exchange, where stocks across the board have had a 14-month slump.

Wilson continued: “Whether by choice or necessity, investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to escalate into a region they know not to go. And they can’t live long.”

Wilson’s gloomy projection is echoed by Bank of America chief economist Michael Hartnett, who last week said a “no-landing” scenario for the market is a distinct possibility for the first half of this year.

‘No landing’ describes a situation where growth and inflation continue to rise, which in turn could cause stocks to crash.

JPMorgan strategist Mislav Matejka wrote that stocks will not bottom out until the Federal Reserve reaches the end of its aggressive interest rate hike campaign.

Fed policymakers have repeatedly signaled that they will raise interest rates eight consecutive times to a rate between 4.5 and 4.75 percent.

Goldman Sachs and Bank of America, however, believe the rate will end up higher.

Financial institutions recently predicted that the Federal Reserve will raise interest rates three more times a year, after recent data pointed to a stubborn rate of inflation.

Bank of America analysts are predicting three more rate hikes by the Federal Reserve this year, a number previously thought to be just two.

Previously, it was thought that the central bank could only raise rates twice in 2023. Banking giants, however, cited the losing fight against inflation as a reason three might be the magic number.

A disappointing inflation report for January last week showed that consumer inflation rose 6.4% last month.

The figure represented a smaller drop in inflation than the Biden administration had anticipated, though it is the lowest since inflation began galloping in October 2021.

Complementing the disappointing number, wholesale inflation was shown to have accelerated in January by the widest margin in seven months.