Investors have their heads in the cloudsor buried in the sandand are running out of time to salvage their returns before risking a catastrophic end, a Morgan Stanley strategist has warned.
Mike Wilsons grim prediction comes as the S&P 500 continues to rally, up 16% from its October lows and 6% since the start of this year. Morgan Stanleys chief investment officer, voted the No. 1 stock strategist in an October survey by Institutional Investor, drew on a comparison from Jon Krakauers Into Thin Air, which details the tragic true story of three separate expeditions attempting to climb Mount Everest when the peak claimed its worst single-season death toll on record.
Wilson argued the benchmark equity index finds itself in the financial equivalent of the death zone, a term mountaineers use to refer to altitudes where oxygen is no longer sufficient to sustain human life for an extended period of time.
Either by choice or out of necessity, investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to climb into a region where they know they shouldnt go and cannot live very long, Wilson wrote, according to Market Watch. They climb in pursuit of the ultimate topping out of greed, assuming they will be able to ascend without catastrophic consequences. But the oxygen eventually runs out and those who ignore the risks get hurt.
By Wilsons estimate, the S&P 500s price-to-earnings ratio already increased to 18 by the end of last year from just 15 in October. He believes the index has now climbed to heights where the air is at its thinnest since the bull market began in 2009, with its P/E ratio currently sitting at 18.6.
Instead of taking rising valuations as a sign the air has started to thin and they may be left out in the cold, Wilson said investors have taken an even more dangerous route by betting on the most speculative stocks.
Warnings become reality
Wilson is no stranger to his doomsday predictions coming true. The staunch bear correctly predicted last years selloff, when US equities posted their worst performance since the global financial crisis.
Earlier this month Wilson issued another pessimistic outlook, warning the stock market would hit bottom this spring before rebounding during the second half of the year. Even after the late recovery, the S&P 500 would still only post negligible gains for this year, he forecast, finishing with 3,900 points versus a December 2022 close of 3,839.
In his report, he warned optimism based on a pause in the Feds rate hike cycle and confidence around a soft-landing for the U.S. economy will prove to be merely an illusion, one that is sustained by $6 trillion in fresh liquidity global central banks pumped into the economy since October.
As investors reached even higher levels there is now talk of a no landing scenariowhatever that means, he wrote. Such are the tricks that the death zone plays on the mindone starts to see and believe in things that dont exist.
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