That Market Rebound? Sucker's Rally, Says Morgan Stanley

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.

See Also:
V-Shaped Recovery? You’ve Got to Be Kidding Me
Sorry, the Stock Market is Still Screwed


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