Dow on Edge as Morgan Stanley Predicts 10% Wipeout

Morgan Stanley analysts say the stock market needs to go through a 10% correction before the bull market can continue.



By: Ben Brown

Morgan Stanley's chief equities strategist still expects the bullish market to find legs after a 10% correction. | Source: REUTERS/Andrew Kelly
  • The Dow Jones Industrial Average (DJIA) looks nervous on Tuesday morning as stocks trade flat.
  • Morgan Stanley’s chief equity strategist predicts a 10% correction before the recovery continues.
  • As nerves grow, analysts increase their gold targets above $2,000.

After a phenomenal rally yesterday, global stock markets are taking a breather. The Dow Jones Industrial Average (DJIA) edged slightly lower on Tuesday following a nervous open.

But there could be a bigger correction to come. That’s according to Morgan Stanley’s chief U.S. equities strategist Mike Wilson. In his latest research note, he predicted a 10% correction in the near-term.

We think the most likely outcome remains a 10% correction in the broader index.

Dow Jones Morgan Stanley
The red line marks a 10% drop in the Dow, if Morgan Stanley analysts are correct. Source: TradingView

Wilson and his team believe the selloff will be led by the very stocks that drove the rally: tech stocks.

The note comes on the same day the Nasdaq closed its 29th all-time high this year.

Dow struggles as Tuesday’s session dawns

The wild optimism of Monday has worn off and U.S. indexes are treading water this morning.

By 9:39 am ET, the Dow had lost 40.34 points or 0.15% to trade at 26,624.06. The move lower comes ahead of a key earnings report from Disney.

dow jones today
After a big rally on August 3, the Dow edged lower on Tuesday. | Source: Yahoo Finance

The S&P 500 dipped 0.16% to 3,289.46. The Nasdaq slid 0.18% to 10,882.65 to round out a hesitant day for U.S. stocks.

Morgan Stanley still bullish despite 10% drop warning

Wilson has been eerily accurate throughout the last few months. His team called the bottom just a week before the Dow hit its lowest point in March. Wilson maintains we are in the first innings of a new bull run, but the market needs some time to cool off.

Once the correction is complete we expect the bull market to continue to broaden out.

So far, the recovery has been driven by ‘stay-at-home’ tech stocks. Wilson would like to see a larger rotation into banks, cyclicals, mid-cap and small-cap stocks before the real bull market begins.

Watch: Analysts remain cautious on stocks

Many other investors share Morgan Stanley’s caution. Ali Malik, investment advisor at Bank of Singapore, told Bloomberg this morning that his firm is cautious going into the rest of the year.

We are still invested in equities, but we are neutral. Having seen the market run up as much as it has from the March lows, we remain very cautious going into the second half of the year.

Like Wilson, Malik cited the upcoming U.S. election as a possible headwind for stocks.

Is gold sending the Dow a warning?

As investors grow cautious on stocks, they are ramping up their price targets on gold. The ‘safe haven’ hit another record high in yesterday’s session. Analysts see the metal pushing past $2,000 to as much as $2,200. Michael Hsueh from Deutsche Bank believes $2k is imminent for gold:

We had targeted $2000 in Q3 of next year, but now it looks quite certain we’ll be able to reach that level some time this year, if not next month.

Hsueh said the gradual slide in the dollar and declining real rates in the U.S. are strong catalysts for further growth in gold.

Maybank Group Wealth Management’s Eddy Loh said he wouldn’t be surprised to see some profit-taking in the near-term. But all the major drivers remain in place for the mid-term.

In terms of gold being an effective hedge against market volatility and geopolitical tensions, I think that function still remains. So we won’t be surprised to see gold prices surpass the $2,000 mark or higher.

The demand for gold could be a warning sign for the equity markets. Some doomsday analysts still expect a final ‘melt-up’ in stocks before an 80% selloff.

Samburaj Das edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.