Economic News

Morgan Stanley Advises Investors to “Embrace” Potential Recession

The last week of 2018 was a wild one on Wall Street. Following the worst Christmas Eve on record — which saw indexes fall to their lowest point of the year — Boxing Day brought a rally that resulted in the largest single-day point gain in the history of the Dow. Since all that madness the markets have been relatively calm but, as CNN Business reports, a Morgan Stanley analyst warns that another storm is brewing.

In a report forebodingly titled Don’t fear a potential recession; Embrace it, Morgan Stanley’s chief U.S. equity strategist Michael Wilson wrote, “Should the hard data deteriorate further, as we expect, we think the market will quickly return to pricing in a recession and rate cuts.” Adding to what he alluded to in his report title, Wilson continued, “We think the odds of an earnings and economic recession have increased materially.” You may recall that Wilson previously made headlines in November when he declared “We are in a bear market.” Of course the holiday downturn seemed to add credence to Wilson’s assertion.

Unlike market sell-offs that (as we’ve seen) can happen quickly and violently, recessions in the technical sense do take time to emerge. A recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth — something not experienced in the U.S. since the so-called Great Recession in 2008. In fact CNN Business notes that, were GDP growth to last through this summer, it would mark the longest period of growth in United States history. The U.S. GDP previously grew by 3.5% in Q3 2018 following a 4.1% Q2.

While a recession might not be here yet (or for a while even), the majority of investors do expect the market to start slowing. A newly-released survey of fund managers found that 60% believe global growth will slow within the next 12 months. Interestingly that level of pessimism is the highest observed since July of 2008.

The good news is that, unlike 2008, any impending recession that does arrive is expected to be both “shallow and brief,” in the words of Wilson. Moreover he admits “We don’t know if an economic recession is coming or not.” Ultimately, regardless of when it arrives, it’s a certainty a recession will hit the U.S. markets once again. All we can hope is that it is as “shallow and brief” as Wilson suggests, and that investors are prepared for the potential blow.