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Investing.com – Strong stresses in the banking system could be the beginning of the end of the bear market in US stocks, said Michael Wilson of Morgan Stanley (NYSE).
The strategist — who correctly predicted last year’s stock sell-off and recovery in October — wrote in a note. “We argue that a banking crisis would mark the beginning of the end of the bear market, as reduced availability of credit curtails growth outside the economy.”
The S&P 500 will remain unattractive until the equity risk premium rises to 400 basis points from the current 230 level, according to Wilson, who is known for being one of the strongest bears on Wall Street.
The collapse of the Silicon Valley bank and the sell-off in Credit Suisse shares raised concerns about the health of the global financial system this month, sending markets into turmoil. US stock futures fell on Monday after UBS’ agreement to buy Credit Suisse and moves by the central bank to boost dollar liquidity failed to assuage investor concerns about the health of the global banking system.
“This is exactly how bear markets end – an unexpected catalyst that forces market participants to acknowledge what was in front of them all along, that the bear market is over and it’s time for the bulls to come back,” Wilson wrote.
Ongoing turmoil in the banking system should prompt investors to focus on deteriorating growth prospects amid restrictive credit conditions, according to Wilson.
“The events of the past week mean that the availability of credit is declining for a broad swath of the economy, which may be the catalyst that finally convinces market participants that earnings estimates are too high,” he wrote, adding that credit crunch risks increased.
The expert recommends positioning in defensive sectors and stocks, while cautioning against the view that big tech stocks are immune to growth concerns.
Wilson is not alone in foreseeing a tough time ahead for the markets. JPMorgan-led strategists said the inversion of the yield curve indicated a recession ahead. The first quarter will likely be the high point for stocks this year, they wrote in a note, adding that stocks won’t bottom out until the Fed focuses on interest rate cuts.
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The pressure continues
“Investors are still having a hard time assessing the asset situation,” said analyst Pierre Ferret of ActiveTrade, still awaiting the US Federal Reserve’s meeting on Tuesday and Wednesday.
In evidence of the constant volatility, investors preferred assets considered safe havens, especially gold and the sovereign debt market.
On Sunday, Switzerland’s largest bank, UBS, acquired its competitor, Credit Suisse, which is facing a serious crisis, while the government announced the provision of major guarantees, hoping to avoid a severe crisis and restore the “confidence” of investors in the world.
The value of the deal is three billion Swiss francs (3.02 billion euros) payable in the form of shares, or 0.76 francs per share, after the value of Credit Suisse shares on Friday was 1.86 Swiss francs.
With the aim of calming banking pressures, official statements were issued stating that “the European banking sector is resilient, with solid levels of capital and liquidity,” according to what the European Central Bank said Monday in a joint statement with the European Banking Decision-Making Mechanism and the European Banking Authority.
The German Federal Financial Supervisory Authority “Baffin” confirmed that the national financial system is “stable and strong”.
“The more policymakers move, the more bad news investors will expect, which creates a terrifying negative feedback loop, as if investors are asking: What do they know that we don’t?” said Stephen Innes of SBI Asset Management.
Now he is confused about him and the markets are confused with him.. How will gold, dollars and bonds react to the interest decision now?
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