A veteran trader has just warned in MarketWatch the stock market faces ‘unlimited downside risk.’
“There is unlimited downside risk in the market right now and I don’t think it’s being respected,” he wrote.
“It’s not until afterwards that they ask, ‘what happened?’” When the bottom falls out, that’s when the blaming begins.
While many investors expect, or at least hope, that stocks will rebound from their recent selloffs,
Morgan Stanley has a pessimistic view, seeing yet more declines ahead.
Morgan Stanley sees declining liquidity and rising concerns about peaking growth as factors that will inhibit further gains for the market, as well as a shift by investors into a more defensive mode.
"The market selloff has taken on a life of its own and selling is begetting more selling, but so far we haven’t seen a capitulation moment, so I’m taking a more cautious approach,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
The source of this stock-market bloodbath is manifold.
However, economists generally agree the overarching theme is that investors are concerned about a debt bomb and the impact of a currency war between the U.S. and China.
- Policy mistake by the Federal Reserve
- Pentagon warns China training for strikes on US targets
- Rising interest rates that could make U.S. Treasury borrowing more expensive
- A slowdown in global economic growth exemplified in China weakness
- An overall breakdown in stocks, represented in equities trading at multimonth lows
- Midterm election jitters, which have seasonally resulted in some jitters in U.S. markets
- Seasonal October volatility, which has tended to translate into choppy trade
- Worries that the U.S. economy is in the late stages of its expansion and due for a recession
- Italy’s budget crisis
- The looming end of quantitative easing in Europe
- The political implications of the killing of dissident journalist Jamal Khashoggi
- Worries about the health of emerging markets outside of China.
- Signs from U.S. companies that they are see earnings growth slowing
- U.S.-China trade relations which may be exacerbating Beijing’s economic malaise
- Growing deficits partly derived from President Donald Trump’s corporate tax cuts in 2017
- Weakness in the banking sector which hasn’t benefited from rising interest rates
- Softness in transports which Dow theorists tend to follow as a gauge of the health of the market
- A rotation of investors out of growth stocks and into those names viewed as value
- Major cracks in the housing market
- A weak earnings outlook
"The market could plunge 15% or more as ‘rolling bear market’ begins claiming victims," Morgan Stanley warns
Morgan Stanley's Michael Wilson believes the stock market is entering a destructive debt bomb phase.
His comments came on CNBC's "Trading Nation," where he was speaking publicly.
As for next year, he doesn't see the situation getting better.