With volatility and oil prices up while Fed policy is easing,
our CIO and Chief U.S. Equity Strategist Mike
Wilson breaks down why today’s selloff is giving flashbacks to
March 2025—and why he believes his bull case still holds.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll discuss how the equity market has been
processing recent headlines for months.
It's Monday, March 16th at 1 pm in New York.
So, let’s get after it.
Last week on the podcast, I noted it was clear to me that the
current equity market correction began last fall when liquidity
first started to tighten. As soon as funding markets started to
show stress from that tightening, the Fed responded by announcing
it would end its balance sheet reduction program earlier than
expected. It then followed that up by restarting asset purchases
in December. This pivot subsequently led to better equity
performance in January.
It also happened alongside a sharp decline in the U.S. dollar and
concentrated returns in emerging markets and commodity-oriented
sectors like gold and silver, industrial metals, oil and memory
stocks. More recently, the dollar has rallied and these same
areas have noticeably cooled off. The key point is that before
the attacks in Iran two weeks ago, the correction in equities was
already very well advanced in both time and price. In fact, 50
percent of all stocks in the Russell 3000 are now down 20 percent
from their 52-week highs.
In many ways, we find ourselves in a similar position to last
year. Recall that the major indices started to accelerate lower
in February and early March. The concern at that time was
centered around tariffs. But like today equity markets had been
trading poorly for months under the surface on additional
concerns that had nothing to do with tariffs. More specifically,
equity markets had been worried about risks related to DeepSeek,
immigration controls, and DOGE. Tariffs then provided the final
blow. This time around, markets have been worried about AI
disruption on labor markets, private credit defaults and
liquidity tightness well before the Iran conflict
escalated.
Now it’s interesting to note – but not surprising – that crude
and volatility began to rise in January, signaling the market was
ahead of this risk, too. Corrections typically don’t end though
until the best stocks and highest quality indices get hit, and
that usually takes a capitulatory shock. Last year, this was
Liberation Day. This time around, that event is the Iran conflict
and concern about a sustained rise in crude prices above $100 a
barrel. This final corrective phase has begun, in our view, with
the S&P 500 having its worst two-week stretch since last
April.
To be clear, I don’t expect this capitulation or drawdown to be
as bad as last year for several reasons.
First, last year’s events came at the end of what we were calling
a rolling recession at the time and effectively marked the end of
that downturn. That means equities were pricing in a recession at
the lows in April 2025 and that’s why the S&P 500 was down 20
percent from its highs.
Second, the current backdrop for earnings and economic growth is
much better than a year ago. Third, fiscal support is much
greater today, too. Specifically, personal income tax cuts are
flowing through right now with tax refunds running 17 percent
higher year-over-year. Tax incentives in the [One] Big Beautiful
Bill [act] should drive higher capital spending. Lastly, the Fed
is much more accommodative with asset purchases versus balance
sheet contraction in 2025.
Bottom line, equity markets have been digesting many of the
concerns for months that are now hitting the headlines. We think
this means that we are closer to the end of this correction
rather than the beginning and investors should be getting ready
to buy any final capitulation that may occur on the next bad
headline.
One scenario that might create that final downdraft is a
combination of a more hawkish Fed this week on backward looking
inflation concerns combined with Triple Witching options
expiration. Or maybe the upcoming trade meeting between the
United States and China is delayed or cancelled. Whatever it
might be, market lows happen faster than tops. So be ready to add
risk in anticipation of the bull market resuming.
Thanks for tuning in; I hope you found it informative and useful.
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