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Morgan Stanley’s chief US equity strategist Mike Wilson warns that markets are still in a bearish cycle and investors are being fooled by a spike in liquidity.
In a new Bloomberg Television interview, Wilson predicts that equities will finish out the year weaker than they are trading at today due to adverse macroeconomic fundamentals.
He says an injection of new liquidity from the Federal Reserve’s emergency loan program established to rescue collapsing banks is propping up the markets and misleading investors.
The Business Standard reported in March that the FED’s Bank Term Funding Program could inject as much as $2 trillion into the US banking system to ease the liquidity crunch.
Says Wilson,
“We think the overriding driver of this year’s rally has been increased liquidity. Liquidity has improved dramatically, both on a global scale, and a weaker dollar has helped, that’s going the wrong way now again. And then, of course, ironically, the banking failures that happened in March led to an injection of liquidity from the FDIC (Federal Deposit Insurance Corporation) and the Fed. And we think those things have conspired to drive the market.”
Wilson also says that the rise in market liquidity is largely evident in this year’s strong performance of cryptocurrencies and tech stocks.
However, he does not believe that the market fundamentals are there to support a continued rally, and he predicts a market dip to finish out the second half of the year.
“Nobody talks about the fact that crypto is up 60% this year. And then the next one, of course, is the tech world. So this is what’s going on. We think that the fundamental case does not support where stocks are trading today, whether it’s at the index level or the single stock level and the second half is going to be a bit choppier and probably downward in the index.”