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Wall Street's Lonesome Bear Expects a 20% Drop In Stocks

Lonesome Bear
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EDITOR NOTE: Is it conceivable that a market can be grinding toward new highs while simultaneously experiencing “corrections” under the surface? This conjures up the image of a construction crew adding more levels to a skyscraper whose foundations are cracking. Ultimately, gravity will have the last say, and the building will have to succumb to its brutal command. That’s how Morgan Stanley's Mike Wilson (the "lonesome bear") sees the broader stock market. So, before you read this article to evaluate his forecasts and scrutinize his fundamental rationale, ask yourself--are you prepared for a steep 20% drop in the stock market?

Back in the summer of 2018, when stocks were surging at least until the fourth quarter when the Fed made the policy error of hiking too hard and unleashing the first mini bear market since the financial crisis, and when virtually all sellside analysts were euphorically bullish, Morgan Stanley's Mike Wilson emerged as the street's lonesome bear (in addition to SocGen's permabear Albert Edwards of course), and it was then that Wilson first popularized the concept of the "rolling bear market." Speaking in May of 2018, Wilson said that "every sector has gone down at least 11 or 12 percent at least once this year. Some were down 18, 19, 20 percent. It’s fooling everybody at the index level, but there’s a lot of pain out there: Staples, homebuilders, some of these semiconductor stocks that are more cyclical are having problems."

Fast forward a little over three years, when Wilson has just reincarnated the "rolling" drop concept, only this time it has yet to grow to a fully mature "rolling bear market" and instead in his Monday Weekly Warmup note, Wilson defines what is plaguing thebroader market as a series of "rolling corrections", which like 2018 has meant that while 2021 has "produced another year of above average returns for major indices, under the surface it has been far from easy to navigate." This, to Wilson, is a classic mid-cycle transition price action (as a reminder Wilson has been pounding the table on his assertion that the market is now mid-cycle") resulting in "rotations away from higher risk with deteriorating breadth." The ultimate outcome of such rolling corrections will be a 20% "de-rating" in the broader market, i.e., an aggressive selloff.

Here is how Wilson defines his own descent into bearishness:

Originally posted on ZeroHedge

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