Up is down, down is up, the bull is a bear, the bear is a bull and an economy in recovery is really in recession.
Such is the current state of the markets, according to Morgan Stanley strategists, who see a “Bizarro World” where nothing makes sense and it’s getting tougher and tougher to make a buck.
“Everything seems backwards,” Adam Parker, the firm’s chief U.S. equity strategist, said in a note to clients. “Sell winners, buy losers, own staples in both up and down markets. Just do the opposite of what makes sense.”
The “Bizzaro” reference is familiar to Superman fans for a world where the Man of Steel is really a bad guy and everything else is upside down as well.
But for Morgan Stanley, it’s been no comic book but rather stark reality. The firm’s investment portfolio registered its worst month in more than five years — 61 months, to be exact — as the stock market got off to one of its worst starts ever this year.
“Our portfolio advice has been pretty horrendous lately,” Parker confessed. He added:
For those who follow our portfolio, we did quite well over the five years from 2011-2015. But, our portfolio just had its worst month in 61 months in January,and things have not improved in February.The market is down more than we thought it would be. Our biggest sector bet has been financials (particularly credit cards). As an investor recently said to us at a conference, “I am doing a lot of things, just nothing with confidence.” Doing the opposite of what were commended would have been better. Bizarro World. Or at least hopefully not the real world.
Parker and Morgan Stanley, of course, have plenty of company.
Most Wall Street firms had a fair amount of confidence and have been forced to walk back their aggressive forecasts in recent days. Barely a month into 2016 Bank of America Merrill Lunch on Friday cut its full-year S&P 500 forecast from 2,200 to 2,000. Wells Fargo on Tuesday followed by slicing its range from 2,230-2,330 to 2,000-2,100, a 10 percent reduction.
The typical investor portfolio had declined 10.35 percent year to date, according to Openfolio, which compiles the number from results of 60,000 users on its social networking site.
Parker reiterated many of the oft-cited factors working against the market, such as the sharp decline in energy prices, a slowdown in China and worries that the Fed might make a policy mistake.
He added a few: That the health of the U.S. consumer may have been overstated; an investor focus during earnings season on punishing companies that missed estimates rather than rewarding the beats; and fears that the fixed income market and its plunging bond yields are a more accurate forecaster of the road ahead than the optimistic equity market.
Added together, Parker still holds a generally bullish case for the market, stated with a contrarian twist:
The positives are this: No one is articulating a bull case for U.S. equities with conviction. Earnings expectations are potentially low.There is some fiscal stimulus this year (vs. drag previous years). The presidential candidates don’t appear to be multiple expanders now, but they will get more centrist and the riffraff will be removed in a few more weeks. Sentiment is low (two weeks ago an investor on a panel we moderated said, “It is a multi-variable world and every variable is negative”.) The U.S. probably looks relatively better than other parts of the world. So maybe, the bull case is just that no one can articulate a bull case.
From a strategic standpoint, Parker said the firm is “a bit more nervous than we were last year.”
That translates to overweighting health care and utilities, staying underweight energy and cutting discretionary. Morgan Stanley also is cutting its position in American Express and Hewlett-Packard and upping its stake in Apple, among other moves.
Correction: An earlier version misspelled “Bizarro.”