Warning Signs of a Possible 26% S&P 500 Crash in the First Half of 2021

Morgan Stanley strategists are forecasting that the S&P 500 could drop by as much as 26% during the first half of 2021 due to a major warning sign present in the expensive US equities.[0] The risk-to-reward for equities is now “very poor,” especially with high corporate earnings expectations, and the Fed not anywhere close to ending its monetary tightening policy.[1]

January saw a 6.4% rate of inflation, significantly lower than the 40-year high of 9.1% recorded in the previous year, yet still far above the Federal Reserve’s target of 2%.[2] Questions have been raised about whether the Federal Reserve might increase its benchmark rate by up to 50 basis points when it convenes for its upcoming meeting.

The US central bank recently raised the benchmark rate by 25 basis points, taking the cumulative increase since last March to 450 basis points. Federal Reserve policymakers have signaled the US central bank will raise borrowing costs above 5% and then hold them there for the whole of 2023, in a bid to tame US inflation to its 2% target level.

Wilson has predicted the S&P 500 could crash 26% to 3,000 points within months, and JPMorgan’s top strategist, Marko Kolanovic, said he is “turning more defensive,” recommending investors fade this year’s stock rally because “a recession is currently not priced into equity markets.”[3]

A team of researchers, headed by Mislav Matejka, noted in a recent report that it is too soon to definitively say that a recession is avoided, given the Federal Reserve’s recent actions of increasing interest rates, as the effects of monetary policy on the economy can take up to two years to manifest.[4] It is believed that the central bank would only shift its focus in the face of a more severe macroeconomic situation than what the markets are expecting, they stated.[5]

As stock prices have reached even higher levels, there is now talk of a “no landing” scenario – whatever that means.[6] The death zone can make one’s mind play tricks on them, leading to the perception of things that aren’t really there.[6]

“The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming,” Wilson wrote.[7]

JPMorgan Chase & Co. has warned that stock investors who have become overly optimistic about the economic outlook may face disappointment.[5]

0. “S&P 500 can drop 26% in the first half of 2023, says Michael Wilson of Morgan Stanley” msnNOW, 21 Feb. 2023, https://www.msn.com/en-in/money/markets/sandp-500-can-drop-26percent-in-the-first-half-of-2023-says-michael-wilson-of-morgan-stanley/ar-AA17KfWS

1. “US Equity Valuations At ‘Death Zone,’ S&P 500 Might Fall By 25 Percent: Morgan Stanley Strategist” The Epoch Times, 21 Feb. 2023, https://www.theepochtimes.com/us-equity-valuations-at-death-zone-sp-500-might-fall-by-25-percent-morgan-stanley-strategist_5072988.html

2. “The S&P 500 faces a near-term selloff and likely won’t rally until the Fed starts cutting rates, JPMorgan’s to” Business Insider India, 22 Feb. 2023, https://www.businessinsider.in/stock-market/news/the-sp-500-faces-a-near-term-selloff-and-likely-wont-rally-until-the-fed-starts-cutting-rates-jpmorgans-top-strategist-says/articleshow/98155909.cms

3. “JPMorgan’s Kolanovic Urges Investors to Ditch Stocks for Bonds” Financial Post, 13 Feb. 2023, https://financialpost.com/pmn/business-pmn/jpmorgans-kolanovic-urges-investors-to-ditch-stocks-for-bonds

4. “JPMorgan warns stock rally will fizzle with Fed fallout ‘still ahead of us’” Fox Business, 20 Feb. 2023, https://www.foxbusiness.com/markets/jpmorgan-warns-stock-rally-will-fizzle-fed-fallout-ahead-us

5. “JPMorgan Strategists Say Stock Rally Will Fade By Bloomberg” Investing.com, 20 Feb. 2023, https://www.investing.com/news/stock-market-news/jpmorgan-strategistssaystock-rally-will-fade-3008067

6. “Wall Street’s top strategist warns stocks have climbed into the ‘death zone’ where ‘they shouldn’t go and cannot live very long’” Yahoo! Voices, 20 Feb. 2023, https://www.yahoo.com/now/wall-street-top-strategist-warns-170944264.html

7. “Bear market rally ‘based on a Fed pause/pivot that isn’t coming’: Morgan Stanley strategist” The Globe and Mail, 21 Feb. 2023, https://www.theglobeandmail.com/investing/markets/inside-the-market/article-bear-market-rally-based-on-a-fed-pausepivot-that-isnt-coming-morgan