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Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally

Updated February 13, 2023 12:32 PM EST

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As stocks stage a comeback ahead of a critical inflation reading, Morgan Stanley’s chief investment officer warns that the market’s recent rebound is beginning to resemble a bear market rally last summer that eventually led to new lows for major indices — especially since gains in the resurgent tech sector were largely disappointing.

Important facts

In a note to clients Monday morning, Morgan Stanley strategist Michael Wilson recalled how the S&P 500 rose more than 15% last summer on hopes that the Federal Reserve would soon return to its aggressive policy to curb inflation will transition – something officials are still insisting will not happen anytime soon nearly a year later.

The S&P finally fell more than 16% to a multi-year low in October as officials dashed hopes of a turnaround, and Wilson warned on Monday it appeared stocks “just made the same mistake again,” pointing to it pointed out that tech led growth again last summer, although hopes for a change in Fed policy still appear “premature”.

To make matters worse, earnings forecasts are now “much worse” than last year and have turned negative on an annualized basis, with tech earnings in particular having “broadly disappointed” and falling 13% this quarter — the worst annual growth rate since the Great Financial Crisis , the analysts note.

With hopes of a Fed pivot now fading and earnings continuing to deteriorate, the market is “about as far from reality as it was during this bear market,” says Wilson, expecting the S&P to fall 5% to end the year at 3,900 points could fall as much as 14% to 3,500 if things get worse.

What to look out for

The Labor Department will report inflation for January on Tuesday morning. Economists expect the consumer price index to have risen by an average of 6.2% on an annual basis – signaling a decline from 6.5% in the previous month. More than that could suggest the Fed may be having a harder time taming inflation than experts believe — a development likely to continue to shake markets.

key background

The stock market collapsed last year as the Fed’s rate hikes began slowing the economy, effectively reversing a series of outsized stock gains propped up by government stimulus measures during the pandemic. After surging 22% in 2021, the tech-heavy Nasdaq plummeted 33% in 2022, while the S&P fell 9%. As inflation eased this year from 40-year highs, the Nasdaq and S&P are up 14% and 8%, respectively; However, Wilson and other pundits have feared the rally could be fake, especially if inflation stops cooling — or worse, picks up again.

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“Ongoing economic concerns and volatility continue to plague markets, threatening a second straight year of decline,” said Seema Shah, chief global strategist at Principal Asset Management. “While downturns can indeed be difficult, history shows that they are often shorter-lived than bull markets.” Shah points out that since World War II, bear markets have lasted an average of 14 months and resulted in a 36% market decline. In contrast, the average bull market lasts nearly six years and returns 192%.

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Labor market added 517,000 jobs in January – unemployment rate falls to 54-year low of 3.4% (Forbes)

The Fed is raising rates by another 25 basis points – a sign that more rate hikes are yet to come (Forbes)

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