“Do you wish you were a cockroach?”
That’s one of the more amazing headlines from Wall Street research we’ve read in a while.
And it comes from Morgan Stanley’s chief US equity strategist Adam Parker, who writes some of the most forthright notes to clients in his field.
The main point of this note out Monday was that even as Wall Street is getting bullish on stocks, he sees the S&P 500 falling from current levels, after a rally that raised it to flat for the year.
And just what does this have to do with roaches?
Parker says the insects survive because of their adaptability: they can survive for weeks with their heads chopped off, for example.
More interestingly, they travel in the wind’s direction, and change course if the wind changes.
But Parker says his team has not imitated cockroaches well enough. That’s because they turned bullish earlier this year when markets sold off. And now, Parker is getting bearish as it seems stocks are climbing again.
Here’s Parker (emphasis ours):
In February, the consensus seemed to be that there was more downside to the bear case than upside to the bull case, and that the bear case was more probably. Now, the S&P 500 has rallied strongly to near all-time highs, and some investors seem to think the risk-reward has improved. We disagree. How can investors think that markets will remain volatile and also be more bullish after a market rally? The cockroaches will turn around as soon as the wind blows in the other direction, which is likely to happen in the second quarter. It is hard to forecast what will cause it, but we think it is prudent to expect the S&P 500 will pull back some from today’s levels. We don’t want to be cockroaches, even though that has been the right strategy year-to-date.
Parker says he can’t exactly pinpoint the catalyst for a move lower.
He identified some possible positives in the coming weeks, including a decent Q1 earnings season starting next week (with 4% profits growth this year) and a relatively strong economy.
Parker wrote, “It just seems prudent to think that if winds are blowing back and forth, and they just blew pretty hard from one direction, they may reverse course. The cockroach would wait, but we just can’t; we are not as experienced — after all, we are only human.”