Morgan Stanley: “This Is A Bear Market Rally, And We Are Now Selling It”

Monday, March 4, 2019
By Paul Martin

by Tyler Durden
ZeroHedge.com
Mon, 03/04/2019

Despite ten consecutive weeks of gains in the S&P, investors have continued to largely boycott this rally and as JPM wrote earlier, “most investors have not participated in this V-shaped recovery other than corporates and insiders who were accelerating purchases into the sell-off.” And, as we have discussed in recent weeks, one main reason for this lingering skepticism is that a majority of investors are confident that contrary to the constant media cheerleading, what we are experiencing is nothing more than a bear market rally prompted by fresh speculation about “green shoots” and “reflation”.

Addressing this point, BofA’s CIO Michael Hartnett last week noted that in Japan between 1990 and 2003 there were no less than 13 equity trading rallies that exceeded 20%, and seven trading rallies that exceeded 33%, all the while Nikkei was caught in a secular bear market.

Yet while the jury is still out on whether this is just a bear market rally for stocks, when it comes to junk bonds, Morgan Stanley has called it, and in a note titled “Selling the Rally”, Morgan Stanley’s credit strategist Adam Richmond writes that after he turned tactically constructive on US credit on January 7, “in our view, the trade is now mostly done and the risk/reward of remaining meaningfully long US credit is no longer attractive. Specifically, we are exiting our tactical buy recommendation, and reverting to our longer-term cautious view on the asset class.”

First, explaining the bank’s tactical short-term bullish view, Richmond writes that it was based on two simple points:

One, sentiment had shifted too far in the negative direction at the end of 2018, when recession fears were rising fast, many had started to believe the Fed was making a policy mistake, and to some investors, the expectation for spreads to trend wider this year, in fact, didn’t seem bearish enough.

Two, markets finally moved in the direction of pricing in long-term fundamental concerns, with US credit becoming cheap to Morgan Stanley’s long-term fair value estimate for the first time in 2 ½ years.

Going back to Hartnett’s point, Richmond writes that bear markets don’t move in a straight line, “and we thought credit was due for a bounce. Nearly all bear markets have periodic (usually multi-month) rallies, and they are often sharp and painful (for those who are short), just like episodes of spread widening.”

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