Stocks, crude oil, and high-yield credit have all made a comeback in recent days.
This has improved sentiment on Wall Street compared to earlier this year when everything was selling off.
But in a note to clients Monday, Morgan Stanley’s Adam Parker advises clients to not feel better about the markets.
Here’s Parker (emphasis added):
Today’s consensus seems to be that the market goes up and down mid-to-high single digit increments in short but pretty volatile spurts, and ultimately ends up relatively flat six to 12 months from now. That means that we should feel worse now than we did a few weeks ago — not better, because the underlying fundamentals haven’t really moved that much but the market has. On top of this perception of a choppy market headed to nowhere,the consensus is also that the probability of the bear case is greater than the probability of the bull case, meaning the probability of a downward slope to this choppy range is material.
This is even more of a reason to be a bit more cautious than a few weeks ago. Yet, sentiment is clearly more positive. People are asking if they should take more risk now, but they were more negative last month. If the consensus is right that we will chop up and down — and we have some sympathy for this sentiment — then by the time we feel a little better, we should take off risk, not add some. Maybe you should do the opposite of what you think you should do. That’s the new risk management.
So Parker’s basic idea is that since he doesn’t think the factors that were driving these assets lower in the first place have changed much, investors should be worried about the rapid change in stock prices.
The consensus in markets is that stocks will continue to bounce around this year and finish slightly higher if not flat. If that is true, then maybe it’s not time to go all in on stocks, given Parker’s “do the opposite” investing advice.
Morgan Stanley’s “MOST Strategic Portfolio,” which Parker oversees, is not having a great year so far, down 4.5% from December 31 compared to the S&P 500’s 2% loss.
After telling clients they should have taken the other side of his bets this year, this seems to be an extension of his argument that nobody really knows for sure what’s going on.