A Wall Street stalwart is expecting some sharp swings in the equity market as the clock ticks down until an agreementor defaulton the debt ceiling.
The U.S. is edging closer to its $31.4 trillion borrowing limit every day and is supposedly on track to run out of cash by the first day of Junean outcome which would be catastrophic according to Treasury officials, politicians and financiers alike.
With conversation between President Biden and the GOPs Congressman Kevin McCarthy ongoing, all Wall Street can do is hope.
Morgan Stanleys Mike Wilsona staunch bearhas warned investors in the equity market that some sharp swings will be on the cards.
Wilson, ranked the best portfolio strategist in the 2022 Institutional Investor survey, said most clients believe it [the debt ceiling] will ultimately get resolved but not without some near-term volatility with the majority believing the event is a lose-lose for markets.
The strategist outlined that Wall Street would still be hit even if the debt ceiling was lifted because it could potentially squeeze liquidity and push the S&P 500 even lower, given the indexs sensitivity to changes in liquidity in recent history.
Morgan Stanleys historic data revealed that utilities and energy stocks have fared the best during previous debt ceiling standoffs.
Following past resolutions, health care, consumer staples, technology and dividend growth have bounced back well, the data added.
Wilsonwho correctly called the U.S. stock downturn last yearadded: the market is speaking loudly under the surfaceit is bracing for further macro and earnings disappointments.
Such uncertainty is deterring investors from making a wager on underperforming stocks like regional banksdespite it being a bet Big Short investor Michael Burry is willing to take.
Burrys hedge fund Scion Asset Management snapped up $2 million worth of First Republic stock at the end of the first quarter, according to regulatory filings, before it was bought out by JPMorgan Chase.
Wilsons note seen by Bloomberg adds the current White House impasse isnt the only thing the market will need to navigate.
Although earnings reports in the first quarter havent been hit as hard as expected, Wilson added he remains bearish in the longer-term on full-year profits amid slowing economic growth.
What Wall Streets saying
Wilsons sentiments were echoed by Jean Boivin and Wei Li, strategists at the BlackRock Investment Institute, who said they expect to see market volatility in the run up to the showdown on the debt ceiling issue.
Elsewhere on Wall Street JPMorgan is similarly projecting a major stock market meltdown in the final days of May if an agreement isnt reached.
JPMorgans Asset Management chief global strategist David Kelly added that markets should recover quickly, saying: It is best not to think of the debt-ceiling crisis as a potential rerun of the Great Financial Crisis.
Restoring confidence in the U.S. banking system in the wake of the subprime crisis was an immensely complicated and uncertain task, he explained. By contrast, recovery from a debt-default crisis would likely start the day Congress, belatedly, suspended the debt ceiling.
Bank of America has similarly been preparing for a default for months, with CEO Brian Moynihan saying: Hope is not a strategy.
In February he told CNN: Its a political process and theres got to be an argument about how we make sure we live within our means as a country, and that arguments going to go on.
