Morgan Stanley: 3 Reasons Why Market Could Correct in Near Future

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Mike Wilson, Morgan Stanley's chief US equity strategist, believes a stock market correction is on the horizon.

Mike Wilson, Morgan Stanley's chief US equity strategist, believes a stock market correction is on the horizon, according to Business Insider.

The recent stock market rally is largely attributed to a massive demand for technology stocks. Hedge-funds have poured into Apple, Amazon, and Facebook. The main picks by funds have outperformed the S&P 500 by 13 percent year-to-date, according to Goldman Sachs.

Wilson is bullish on stocks and believes that they will continue to rise. However, he believes the "the first tradable correction" in stocks could begin "imminently." A correction would require a 10 percent decline in the S&P 500. Apple and other large-cap companies carried the S&P 500 to new highs last week due to the index being price-weighted.

A simulation was run that weighed all S&P 500 companies the same. The simulation determined that the index fell 1.5 percent and was below its peak on June 8. This led Wilson to derive three catalysts that could disrupt the market rally and provide an opportunity for investors to get stocks at a discount.

  1. Outbreaks of the virus that hamper school reopening plans.
  2. Congress remains gridlocked over the next stimulus package.
  3. If the economy starts to go south, it could force Congress to release a larger stimulus package.

To put all of this together, Wilson believes that an economic pullback resulting from school-disruptions and gridlock in Congress could result in an even bigger stimulus package from Congress. This would induce inflation and therefore raise interest rates which would ultimately lead to a correction in stocks.

To protect your portfolio against this potential correction, Wilson recommends adding consumer-services stocks to your portfolio.

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