Chris Toomey, Morgan Stanley managing director and private wealth advisor, is convinced stocks could trade lower still. The S&P 500 that is just in the green on the day, has been down two of the past three days. However, it’s up nearly 17% year-to-date. The Nasdaq Composite is +30% YTD.
Toomey, who has also shared a similar outlook to the current one, told CNBC’s ‘Closing Bell’:
“I think right now we’re really dealing with the fatigue of the move up higher right like that was kind of a parabolic move higher and now the market has to digest this giant move.”
He also pointed to the earnings being not as impressive as expected and the “seasonality of August and September typically being bad” as potential signals of downward moves. Also key to his observation is the technical outlook of the market – where a gigantic move as seen with stocks’ recent rally usually follows up with a dramatic decline before there’s broader stabilization.
Look at earnings and macro scenarioStocks opened flat on Wednesday and traders are anxious after the strong retail sales. According to Toomey, equity prices have risen in recent months while earnings and margins have showed declines. Noting that this isn’t sustainable, he says the market could be looking at a scenario where earnings have to drop – leading to a potential sell-off.
“What you have to think about is what’s priced into the market right now, and right now you’re expecting higher earnings and you’re expecting lower rates and so when the market is in a situation where it’s not necessarily price for perfection, that’s when I would say this is a good opportunity to get in”
Other than earnings and the Fed’s interest rates outlook, Toomey sees macro situations such as that related to Russia-Ukraine or China as key down the road. The current markets have largely not priced in potential macro moves on this level and investors might just need to be patient.
His comments come even as the stock market braces for the Fed minutes that could provide fresh hints on the central bank’s thinking around interest rate hikes.
During its last meeting, the US central bank raised the country’s interest rates to the highest level since 2001. Many experts see the Fed signaling an end to the rate hikes when the FOMC minutes are released at 2pm ET. According to the current reading from a FedWatch tool, over 88% of traders think the Fed will pause.
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