Stocks in 2019 have thus far befuddled Michael Wilson.
The star Morgan Stanley strategist who accurately predicted the 2018 correction appeared to be adopting a more bullish tilt as his calls for a “rolling-bear market” this year have so far failed to pan out.
“I did not expect us to be at all time highs by April,” Wilson, the firm’s chief U.S. equity strategist, told CNBC during a Tuesday afternoon interview as the S&P 500 index SPX, +0.88% and the Nasdaq Composite Index COMP, +1.32% both punched above their closing highs, and the Dow Jones Industrial DJIA, +0.55% wasn’t far behind.
The pace of gains even had Wilson suggesting that the S&P 500 is poised to top another milestone in relatively short order. “We’re probably going to 3,000 in the next couple of weeks,” Wilson said.
To some observers, it might sound as if the prominent market bear is throwing in the proverbial towel.
He has maintained a leaning toward pessimism for much of the year, making the case that equity markets were too richly priced and noting that “risk-reward remains unattractive.” As recently as early April, he said that he was struggling to find a good entry point into a market that defied some downbeat predictions for a corrective pullback and was maintaining his year-end target for the S&P 500 at 2,750. Wilson is hardly alone.
Both the breadth and the consistent degree by which equity indexes have managed to climb have surprised many on Wall Street.
Since the three main indexes put in their lows on Dec. 24, the Nasdaq has climbed 31%, the Dow has gained 22.4%, while the S&P 500 has gained nearly 25%. Notable, is the fact that the burden of the move thus far in 2019 has been equally shouldered by industrials XLI, +0.87% consumer-discretionary XLY, +1.20% financials XLF, +0.62% and communications XLC, +1.34% and technology XLK, +1.12% all of which are up by 20% or better.
It is also important to note that the Value Line Geometric Index VALUG, +1.04% which tracks the media move of a range of stocks and is equal-weighted, is still 7% off its Aug. 29 all-time high, but has been steadily climbing since its December nadir.
The Value Line is used by many technical analysts as a measure of broad-market participation, or breadth, in rallies or selloffs because indexes like the S&P 500 and Nasdaq, which are market capitalization- weighted, can be skewed by bigger constituents like Facebook Inc. FB, +1.29% Apple Inc. AAPL, +1.46% Amazon.com Inc. AMZN, +1.95% Netflix Inc. NFLX, +1.21% Google parent Alphabet Inc. GOOG, +1.25% GOOGL, +1.32% by virtue of their mega market values.
“The market is telling me I’m wrong because the breadth is improving,” Wilson told CNBC.
All that said, Wilson still maintains that stocks are likely to see an earnings recession, defined as at least two consecutive quarters of declining earnings per share, or EPS, which could make it difficult for investors to justify buying stocks at increasingly lofty valuations.
“I have to respect my fundamental work…and also respect my model,” though he said that the current state of the market feels more akin to a “secular bull” rally than a rolling bear.
A reversal of the Federal Reserve’s aggressive path of rate increases and apparent progress in China-U. S. tariff negotiations have been part of the recent bullish narrative. Corporate quarterly results, in the early phase of rolling out, could help provide the final catalyst for stocks, as fears of a U.S. economic recession, at its apex in late March, has receded.
One theory for the drift higher and the potential for further gains resides in comments that BlackRock Inc. BLK, +2.16% Chief Executive Larry Fink last Tuesday. Fink said that a so-called melt-up may be at play. A melt-up is often defined as a sharp and unexpected rise in the price of an asset class, driven largely by a stampede of investors who are more concerned about missing out.
See: Stock market at ‘risk of a melt-up, not a meltdown,’ warns BlackRock’s Larry Fink
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