- The stock market faces four powerful risks that could soon halt its advance towards new highs, according to Andrew Sheets, the chief cross-asset strategist at Morgan Stanley.
- He says investors would want to reduce their exposure to stocks and raise cash balances because of the pandemic and election-related risks.
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2020 has been a challenging year for many investors. Unfortunately, we're only about halfway through.
If you were hoping the rest of the year in the stock market would look like the last few weeks, Morgan Stanley's cross-asset strategists have a sobering message for you: there are multiple near-term hurdles that are so high that the market's persistent climb higher could end.
"No market travels in a straight line, and we see several reasons why investors would want to tactically dial back exposure into August-September," said Andrew Sheets, the chief cross-asset strategist, in a recent note aptly titled "The Danger Zone."
Despite his concerns about the fall, Sheets sees a few positive catalysts supporting stocks for the next few weeks.
Fiscal and monetary stimulus continues to pour in from every corner of the world.
Also, economic numbers are improving, and stocks are pricing in yet more gains. Granted, many of the data points are advancing from historically low levels and after a deliberate stoppage of economic activity. But investors clearly like the positive surprises they're seeing so far.
More good surprises are potentially on the way as companies report earnings because the bar has been set really low. Analysts estimate that S&P 500 earnings shrank by 45% in the second quarter — the largest decline since 2008 — according to FactSet.
But that's where the positive catalysts end, according to Sheets' team. They suggest taking some profits on the good news that arrives in the intervening period before August and September.
These are the four risks that loom large on their radars:
1. A slowdown in economic momentum
Many economic data points are trouncing expectations because they are rising from historically depressed levels. The problem is that each passing month is likely to bring a less-impressive improvement from the past, and surprise to the upside by less.
The slowdown is not just driven by tough comparisons. Amid rising case counts in the US, several states have slowed their reopening processes — and the data on retail sales and weekly jobless claims are reflecting this. Morgan Stanley's economists even see a high probability that job gains could temporarily turn negative again in July or August.
2. A twofold risk for the fall: second-wave infections and schools remaining closed
Many health experts are worried that the flu season will come with a deadly new wave of COVID-19 infections.
These pros are also recommending that people keep limiting the sizes of indoor gatherings, which naturally include in-person schooling. While this guideline will keep people safe, it is devastating for parts of the economy that thrived off the old normal.
Sheets added that the impact of extended school closures will be particularly acute in the US.
3. Stocks historically underperform prior to elections
Prior to the last six US presidential elections except 1996, stocks performed worse-than-average between August 1 and November 1. Investors and companies alike entered a holding pattern, declining to take big risks until they had clarity on who would emerge victorious.
This year, there is even more reason for caution, Sheets said. For one, the economy is already in a recession. But what's unique about the 2020 cycle is that both parties are offering such drastically different proposals that it seems prudent to have a wait-and-see attitude.
Moreover, the surprising twist of the 2016 election outcome, coupled with Vice President Joe Biden's current lead in the polls, mean that anything could happen.
4. Seasonality is stacked against stocks
It seems like all these risks are coinciding at the worst possible time: July 31 through September 28 has turned out to be the worst 60-day stretch for the S&P 500 since 1990.
With these four risks in mind, Sheets is advising investors to consider raising cash balances before the fall arrives. He also thinks European assets could outperform the US, given that the health and political risks are geographically skewed.
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source https://www.businessinsider.com/next-stock-market-crash-danger-zone-morgan-stanley-andrew-sheets-2020-7
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