Wall Street predictions are wrong about half the time, so take them with a grain of salt.* That said, the current views of Morgan Stanley strategist David Darst have more logic going for them than most. And Darst is about as bearish as brokerage strategists get.
Contrary to the predictions of those who view the market’s recent rally as a sign that it’s off to the races again, Darst says we are following a classic bear-market pattern. In this FT interview, Darst explains that bear markets tend to unfold in three stages:
* Big sell-off (which we saw in the crescendo leading to Bear Stearns collapse)
* Big sucker’s rally (the month of April, with GM up 22%, Citi up 18%, Japan up 11%, and so on)
* A “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 bonified guru Jeremy Grantham, who ridicules the idea of a “V-Shaped” recovery.
The biggest difference between bullish perception and actual reality? Profit expectations. Rosy-eyed analysts are still looking for 11% profit growth this year, says Darst, while Morgan Stanley thinks earnings growth will only be 3%. If this profits cycle follows the usual pattern, even Morgan Stanley’s prediction will probably prove optimistic.
*If they weren’t, you could reliably make money off them, which most academic studies have shown that you can’t. This isn’t because Wall Street analysts are stupid, by the way. It’s because the market is remarkably and annoyingly efficient.
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