Morgan Stanley Predicts a Rough Bear Market after Sell-off October
What analysts portray of the future plays an important part in stock trading and investing decisions.
October Was a Month to Forget, but Things Aren't Bright Enough Yet
Morgan Stanley analysts believe that though October, the worst month experienced by global equities since the 2011-2012 bear market has passed by, there isn't any likelihood of liquidity improving, as Mark Kolakowsky reports in this Investopedia article. They are expecting a "choppy ride" in the remaining part of 2018, from what has been a "rolling bear market" that witnessed nearly all of the sectors going down 20% or even more from the 52-week highs they registered. Now you're likely to witness stock prices moving sideways and volatility rising.
These analysts also believe that earnings revisions would go through a negative trend. Earnings revision breadth is usually measured by taking the total upward revisions made by analysts to their estimates, subtracting the total downward revisions, and dividing by the number of revisions. This figure, for the whole S&P 500, is reported by Morgan Stanley to have sunk to 1.6% from 16.2%.
Among the individual sectors, Morgan Stanley reports industrials as the worst performing in October, falling from the heights of 40.5% to - 3.3%. The materials sector also had a massive freefall, all the way from 4.8% to the depths of - 23.3%. At the beginning of the month, the upward revisions made to earnings estimates exceeded the downward revisions. By the end of the month though, it was the other way round. Morgan Stanley also reports real estate and healthcare as being the two other sectors witnessing the biggest earnings revision drop in the month of October.
Tax Cut Surprises Drove Positive Earnings
According to the Morgan Stanley report, "net income beats" are the result of tax cut surprises. Corporate tax cuts drove positive earnings and improved revisions to earnings. But these cannot be expected to happen again since tax cuts cause growth to head to a peak point and also put the economy through other kinds of stresses. The economy would otherwise have been doing just about fine before the effect of the tax cuts.
Tax Cuts Could Lead to Unintended Results
Now, Morgan Stanley argues that the unintended results of tax cuts are beginning to take effect. These could result in the Federal Reserve accelerating interest rate hikes to restrain pressures of inflation from what they consider an overheating economy.
The rising rates of interest and growth peaks have resulted in stock valuations, in terms of forward P/E ratios, declining significantly in the sell-off in October. Growth stocks were also beaten by value stocks in this period. Morgan Stanley analysts consider this to be indicative of a more permanent change in leadership.
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