A Wall Street stalwart is expecting some sharp swings in the equity market as the clock ticks down until an agreement—or default—on the debt ceiling.
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The U.S. is edging closer to its $31.4 trillion borrowing limit every day and is supposedly “on track” to run out of cash by the first day of June—an outcome which would be “catastrophic” according to Treasury officials, politicians and financiers alike.
With conversation between President Biden and the GOP’s Congressman Kevin McCarthy ongoing, all Wall Street can do is hope.
Morgan Stanley’s Mike Wilson—a staunch bear—has warned investors in the equity market that some sharp swings will be on the cards.
Wilson, ranked the best portfolio strategist in the 2022 Institutional Investor survey, said most clients “believe it [the debt ceiling] will ultimately get resolved but not without some near-term volatility” with the majority believing the event is “a lose-lose for markets.”
The strategist outlined that Wall Street would still be hit even if the debt ceiling was lifted because it could potentially squeeze liquidity and push the S&P 500 even lower, “given the index’s sensitivity to changes in liquidity in recent history.”
Morgan Stanley’s historic data revealed that utilities and energy stocks have fared the best during previous debt ceiling standoffs.
Following past resolutions, health care, consumer staples, technology and dividend growth have bounced back well, the data added.
Wilson—who correctly called the U.S. stock downturn last year—added: “the market is speaking loudly under the surface—it is bracing for further macro and earnings disappointments.”
Such uncertainty is deterring investors from making a wager on underperforming stocks like regional banks—despite it being a bet ‘Big Short’ investor Michael Burry is willing to take.
Burry’s hedge fund Scion Asset Management snapped up $2 million worth of First Republic stock at the end of the first quarter, according to regulatory filings, before it was bought out by JPMorgan Chase.
Wilson’s note seen by Bloomberg adds the current White House impasse isn’t the only thing the market will need to navigate.
Although earnings reports in the first quarter haven’t been hit as hard as expected, Wilson added he remains bearish in the longer-term on full-year profits amid slowing economic growth.
What Wall Street’s saying
Wilson’s sentiments were echoed by Jean Boivin and Wei Li, strategists at the BlackRock Investment Institute, who said they expect to see market volatility in the run up to the “showdown” on the debt ceiling issue.
Elsewhere on Wall Street JPMorgan is similarly projecting a “major stock market meltdown” in the final days of May if an agreement isn’t reached.
JPMorgan’s Asset Management chief global strategist David Kelly added that markets should recover quickly, saying: “It is best not to think of the debt-ceiling crisis as a potential rerun of the Great Financial Crisis.”
“Restoring confidence in the U.S. banking system in the wake of the subprime crisis was an immensely complicated and uncertain task,” he explained. “By contrast, recovery from a debt-default crisis would likely start the day Congress, belatedly, suspended the debt ceiling.”
Bank of America has similarly been preparing for a default for months, with CEO Brian Moynihan saying: “Hope is not a strategy.”
In February he told CNN: “It’s a political process and there’s got to be an argument about how we make sure we live within our means as a country, and that argument’s going to go on.”
This story was originally featured on Fortune.com
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