Stocks Enter ‘Death Zone’
Stocks are in the “death zone” according to Morgan Stanley. The death zone is an altitude so high that there isn’t enough oxygen for mountain climbers to breathe. Several major banks think the stock market is greatly overvalued. It is due to crash like an avalanche. Investors should heed these warnings and take measure to protect the value of their portfolios.
Michael Wilson is the chief US equity strategist at Morgan Stanley. He warned that the S&P 500 could fall 3,000 points within months.1 That would be about a 26% drop from current levels. The bank believes stock prices have been lingering at unsustainably high levels. The prices will plummet once investors finally accept that there will be no Federal pivot later this year.
The Federal Reserve has already elevated interest rates eight times in a row. They are now in a range of 4.5% to 4.75%. The Fed indicated last month that a “few additional” increases are under consideration for this year.
A recent rally in stocks came to a sudden stop in the face of rate hike fears. Investors were eager to put the past year behind them. All three indexes tumbled in 2022. The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4% while the tech-heavy Nasdaq Composite plunged 33.1%.
Morgan Stanley isn’t alone in forecasting a massive drop in stock prices. Unlike a ‘soft landing’, where inflation drops without a recession, or a ‘hard landing’ where there is one, Bank of America predicted a ‘no landing’. They foresee inflation remaining high without a slowdown in growth. The unchecked inflation and continued growth would force the Fed to respond aggressively. As a result, they see stocks getting hammered. The S&P would fall another 7%. And JP Morgan said they don’t see the market hitting bottom until interest rate cuts begin.2
Investor Point of View
Banks aren’t the only ones who see trouble ahead. Legendary investor Jeremy Grantham is the head of GMO. He says this is only the “first and easiest leg of the bursting of the bubble we called for a year ago.” And that we are facing “a rare level of uncertainty.” The Ukraine war is destabilizing food and energy production. It is also still driving up inflation. In addition, he sees a global housing bubble just starting to burst. When it truly hits, there will be a painful economic impact. He foresees a global economic recession. “Because of the sheer length of the list of important negatives, I believe continued economic and financial problems are likely,” Grantham writes. “I believe they could easily turn out to be unexpectedly dire.”3
If you are close to retirement, now is the time to start carrying less risk. A portfolio heavily weighted with stocks is most likely going to take a significant drop in value over the near term. Advisors recommend moving into safe haven assets outside the stock market. A Gold IRA from American Hartford Gold can protect the value of your portfolio even as the market crashes. Contact us today to learn more.