- The US stock market can jump more than 5% in the first half of 2020 after tumbling on coronavirus concerns, Morgan Stanley said.
- The S&P 500's correction of 3.5% was relatively small and "should remain limited" before stocks resume their upward climb, Michael Wilson, the bank's chief US equities strategist, wrote Monday.
- Here are the five reasons for the index's modest slump, and how the S&P 500 can jump as high as 3,500 by June, according to Morgan Stanley.
- Visit the Business Insider homepage for more stories.
The bull market is "still in charge" and has plenty of room to run in the first half of the year, according to Morgan Stanley.
US stocks tumbled through the end of January as news of the coronavirus outbreak drove investors away from stocks and into traditionally less-volatile assets. The S&P 500 fell to as low as 3,214 before kicking off February with numerous record highs, and the market remains near its loftiest levels despite the virus' death toll crossing 900 over the weekend.
The index's correction "should remain limited to 3,100-3,150" before resuming its climb, Michael Wilson, Morgan Stanley's chief US equities strategist, wrote in a Monday note. The bank expects the coronavirus outbreak to "delay but not derail the nascent global recovery," and projects the S&P 500 will fluctuate between 3,100 and 3,500 in the first half of the year.
The S&P 500 hit 3,336.57 at 12:30 p.m. ET Monday, up about 3.6% year-to-date.
Here are the five reasons why the S&P 500's correction was so modest, and how the index could surge more than 5% by June, according to Morgan Stanley.
Slowing contagion
Though the coronavirus outbreak surpassed SARS' death toll over the weekend, new data from China's National Health Commission suggests "the pace of infection has slowed," Wilson wrote. Any positive development around containing the pandemic would likely lift the downward pressure on equities.
Uncertainty surrounding the virus' fallout has kept many analysts and companies from quantifying its damage, and a slowdown in its spreading would arrive at a perfect time for investors, the strategist added.
"The rate of change matters for markets, especially when they were started to price a further acceleration," he wrote.
Global discount
The S&P 500's 3.5% correction was minor compared to the major slumps seen throughout Asia. China's CSI 300 index fell 9% on February 3 during its first session in 11 days, and while US markets quickly recovered, indexes throughout Asia remain well under the levels seen before the outbreak.
The low asset valuations in China and other Asian markets "are now discounting a fairly negative outcome," Wilson wrote. A quick recovery to pre-virus prices could lift sentiments around the world.
Central bank intervention
It's unlikely the Federal Reserve will adjust its benchmark interest rate in 2020 after its three rate cuts last year, but the virus' economic fallout in China, Japan, and Europe could drive previously unexpected fiscal stimulus, the strategist wrote. German and French industrial production data landed worse-than-expected on Friday, yet the nations' respective stock indexes barely fell in the day's trading session.
The mild sell-off could signal investors are pricing in upcoming stimulus to lift the rattled economies, and signs of rate cuts abroad could please US markets.
Fading election worries
Many analysts warned market volatility will likely rise in the months leading up to November's US presidential election. Yet last week's jumbled conclusion to the Iowa caucus and acquittal of President Trump lowered expectations for major government changes, the strategist said. Unless a single party sweeps the 2020 election, the probability for significant policy shifts to fuel volatility is fairly low, he added.
"Our view has been that major changes will likely require a unified government with larger potential changes needing leadership from the executive branch," Wilson wrote.
Unlikely safe haven
The S&P 500 may track relatively volatile stocks, but the index's "high quality defensive growth characteristics" lend it a safe-haven reputation, the strategist said. The index's risk premium has fallen since spiking two weeks ago when virus fears gripped investors. At the same time, realized volatility has spiked, leaving a small gap between the two metrics.
The index's "little buffer" between volatility and risk premium "suggests further gains from here will require this gap to completely close," or for volatility to fall lower, Wilson wrote.
"In short, it is the appropriate asset to own if rates continue to fall so long as we don't have a recession," he added.
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