Morgan Stanley strategist David Darst is “worried” that, contrary to the predictions of those who have been encouraged by the market’s recent rally, it is following a classic bear-market playbook. That’s about as bearish as major brokerage firm strategists get.
In this FT interview, Darst says bear markets tend to unfold in three stages:
- Big sell-off (crescendo leading to Bear Stearns collapse)
- Big sucker’s rally (April, GM up 22%, Citi 18%, Japan 11%)
- “Long, inexorable, relentless, grinding lower that takes 6 months, 9 months, a year.”
We’ve gone through phases 1 and 2, and Darst is “worried” we’re entering the third phase. So is Jeremy Grantham, who ridicules the idea of a “V-Shaped” recovery. So are we.
The biggest difference between perception and reality? Profit expectations. Rosy-eyed analysts are still looking for 11% profit growth this year, says Darst. Morgan Stanley’s looking for 3%. If this profits cycle follows the usual pattern, even Morgan Stanley’s prediction will probably prove optimistic.