MORGAN STANLEY: It's too soon to hunt for bargains as coronavirus fears hammer the market. Here's why the sell-off is far from finished.
- Morgan Stanley US stock chief Mike Wilson is cautioning investors that the sell-off sparked by fears about the Wuhan coronavirus isn't over.
- Wilson says many investors are betting on a recovery in emerging economies and their stocks, and the recovery remains shaky. That means the outbreak in China threatens their views for markets in 2020.
- He adds that when US bond yields start to ease, that will be a stronger buying signal for stocks.
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After fears about the Wuhan coronavirus touched off the biggest drop in months for US stocks, it might look as if investing opportunities are popping up all over. Morgan Stanley says you shouldn't jump in to the market too soon.
Mike Wilson, chief US equity strategist for Morgan Stanley, says the S&P 500 could drop another 5%. That's because of not just the viral outbreak, but the economic fears it's stirring up.
Many investors think that emerging markets, or non-US stock markets in general, are going to do better than US equities this year. That's because US stocks have dominated over the past 11 years, and because there are signs that other economic regions are poised to break out of the doldrums they've been stuck in.
At least, that's how things looked before the coronavirus outbreak. As of Monday, the outbreak has killed at least 362 people and infected more than 17,400 as it's spread to 24 countries. Because of where the virus has appeared, it's a threat not just to people's health and safety, but to investors' expectations for the global economy.
"With the economic recovery still nascent and expected to be led by EM, concerns about the virus tipping the scale will remain," Wilson wrote in a note to clients. "We think this correction has yet to run its course."
After the long Lunar New York holiday, Chinese stocks fell almost 8% Monday, the worst single day in more than four years. Wilson says that depending on how bad the outbreak gets, the S&P 500 could sink as low as 3,100, or about 7% off the all-time high it set on January 17.
The benchmark 10-year Treasury note could match its lows from last summer, around 1.42%. He says there's no sign that defensive shift will stop for now, and that means large-cap stocks and safer assets will keep climbing. However he adds that when 10-year yields do start to turn higher, it will be a sign the stock slump is ending.
While the virus is the immediate cause of the sell-off, Wilson thinks that's not the only reason for the turbulence. He says the recent recovery "has been modest and remains fragile," and will stay that way until economic data and earnings prove that it's for real.
Despite the pain it's causing, Wilson says the outbreak won't derail the economic recovering in emerging markets. But even if it fades relatively soon, its effects can't be ignored.
"We do worry the virus outbreak could delay the overall global recovery given its outsized impact on China which drives EM generally," he said. "We believe there should be a positive payback if virus concerns are eased but that there will be some permanent loss of activity for the year that can't be recouped."