By Senad Karaahmetovic
Morgan Stanley's strategists warned investors that the bear market is "most likely not over." They wrote in a note to clients that betting now on the end of the bear market is "woefully early as there are far too many unknowns."
We are yet to find out whether inflation really peaked despite yesterday's CPI report for October coming in less than expected, which fueled a strong market rally.
"A data-driven Fed is going to be setting policy without confirmation from trends in wages, rents and services inflation, which have been key drivers lately," the strategists said.
Secondly, the strategists remind clients that monetary policy operates with a big lag. While the economy remains strong, we are yet to witness the real impact of aggressive rate hikes on the economy.
"The implication is that the impact of an economic slowdown on earnings—when both volumes and pricing power wane—has not yet been absorbed or reflected in forward estimates. While a 2023 recession is not our base case, many indicators suggest it is inevitable, and even our cautious view could be too optimistic," they added.
Finally, the Morgan Stanley strategists believe valuations still remain stretched and do not provide "bargain discounts at the index level."
All-in-all, they advise against chasing rallies and urge clients to be stock-selective i.e. look for stocks where likely growth is not fully priced.