Morgan Stanley explains why the frenzied day trading in GameStop, AMC, and other stocks is not proof of a full-blown bubble — and shares its advice for navigating a short-term correction
- Morgan Stanley’s Michael Wilson says the selling of the last few days is likely to get worse.
- However he says huge swings in GameStop and other “meme” stocks doesn’t mean a bubble has formed.
- Wilson says hedge funds are selling stock and financial conditions are tightening, but expanding growth will support the market.
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For almost a century, if not longer, many expert investors have said that when regular people start to rush into the stock market, a bubble is forming and a crash is coming.
It’s a belief that was shaped by famous early 20th-century investors like Joseph P. Kennedy and Bernard Baruch, who described the Roaring Twenties as a period where everyone from cooks to shoeshine boys played the market hoping to get rich — inspiring some big investors to sell before the Depression while regular people lost everything.
Imagine what they might have thought of the last couple of weeks as long-struggling retailer GameStop and a handful of other companies became national stories. Or what they’d think of the way silver prices are spiking.
So it’s not surprising that some leading investors today think this is proof the market is heading for serious trouble. That fear contributed to losses over the last week. Morgan Stanley Chief Investment Officer and Chief US Equity Strategist Michael Wilson says things aren’t that bad, although the news for non-“meme stock” investors isn’t all good either.
“While this correction is likely to get worse and feel bad in the short term, this is not a bubble or like 2000,” he wrote in a note to clients.
Wilson says sell-offs like this are normal even in the early stages of bull markets, and after several months of steep gains, a correction of about 10% was due.
He says a couple of factors contributed to it. Least surprisingly, the aggressive short squeezes have pushed hedge funds to sell stocks. Stock market volatility is contributing to that, and so are changes in liquidity.
Another factor, according to Wilson, is that growth in the money supply — measured by consumers’ cash holdings, deposits, savings, and money market funds — has probably peaked, and leverage in the financial system is rising. That means overall liquidity has probably peaked, and it won’t take much for conditions to get tighter.
None of that means a bubble is forming or another bear market is approaching. Wilson rejects the dot-com boom comparison by noting that the current bull market is less than a year old, and the economic cycle is in its early stages.
“We are exiting a recession rather than entering a late cycle environment, the consumer balance sheet has more more capacity for spending, and rates-adjusted valuations are much more reasonable,” he wrote.
But Wilson says the stock market’s dip is going to last for a while longer, and he warns that one approach to equities is going to struggle badly. That’s momentum investing, or buying the market’s latest winners in the hope they’ll keep going up. Right now interest rates are low but rising, and that’s a terrible environment for that approach.
“The current environment should include a number of rapid rotations that can’t be played with typical momentum strategies,” he said.
Wilson also says the ongoing correction will hurt his current favorite themes: Small-company stocks, cyclical companies, and the equal-weighted S&P 500. But he says he’s not losing faith in those trades, and that they’ll resume working after things settle down.
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