Morgan Stanley’s Wilson Says December to Be Rocky for Stocks

US stocks are headed for a rocky end to the year after rallying in November as bond yields fluctuate, according to Morgan Stanley’s Michael Wilson.

The strategist — who remained broadly bearish this year even as the S&P 500 gained nearly 20% — said in a note that December could bring “near term volatility in both rates and equities” before more constructive seasonal trends as well as the so-called “January effect” support stocks next month.

The benchmark S&P 500 advanced about 9% last month — one of its best November rallies in a century — on optimism around a peak in interest rates. That has left the index in overbought territory — a technical level that is generally considered to be precursor to a selloff.

S&P 500 Is in Overbought Territory

Still, the S&P 500’s so-called MACD momentum — which shows the relationship between two moving averages of a security’s price — remains positive, as a slowing economy and a drop in inflation encourage bets that the Federal Reserve could begin to reduce rates as early as March. Fed Chair Jerome Powell on Friday pushed back against expectations of cuts in the first half of 2024.

Wilson said that while investors had priced in a Fed pivot several times in the past year, this time round they have shown “the most support” as they expect it to play out “amid a still healthy macro backdrop.” That scenario “would be the most bullish outcome for equities,” the strategist wrote.