Morgan Stanley’s Wilson Says Midterm Elections Could Fuel a Bear Market Rally

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Michael Wilson, the chief U.S. equity strategist and CIO for Morgan Stanley, has reaffirmed his near-term bullish bias on the U.S. equities as the market remains “resilient” despite hawkish Fed and strong jobs data.

The bear market rally has been hampered by Powell’s hawkish press conference last week. Wilson now warns that the rally is facing another significant test this week in the context of the CPI data and midterm elections.

Wilson, one of the biggest bears on the Street in 2022, recently made a pivot and urged clients to buy U.S. stocks to capitalize on the bear rally.

“If our tactical rally in US stocks is going to have legs into the holidays, 10-year UST yields will need to come down from current levels. Otherwise, it will be difficult to see higher prices for the S&P 500 given how sensitive this large cap growth index is to the discount rate,” Wilson told clients in a note.

Morgan Stanley’s CIO still sees the bear market rally continuing, although it will “remain very noisy in the near term.” Once this event is cleared, Wilson sees equities moving higher on lower volatility.

“If rate volatility continues to fall, P/Es can expand further,” the strategist added.

Moreover, the strategist sees midterms playing a bigger role in terms of volatility. This event is seen as a positive catalyst for stocks to rally if the polls prove to be correct.

“This week’s mid-term elections provide a potential catalyst in that regard if the Republicans win decisive control of both the House and Senate as some polls and betting markets are suggesting. Because this is purely a tactical trading view and not in line with our core fundamental view which remains bearish, we will remain disciplined on how much leash to give it,” Wilson added.

Bottom line, Wilson sees a bear market rally hanging around “for longer than most expect if it can survive this week’s test.”