Rally will fizzle out in a week or two, Morgan Stanley strategist Wilson says

By Steve Goldstein

Critical information for the U.S. trading day

What an incredible rally it was last week, in a big dash for trash as bond yields tumbled. The mostly profitless tech stocks of the ARK Innovation ETF ARKK rallied 19% last week, and the regional banks in the SPDR S&P Regional Banking ETF KRE surged 12%.

Also enjoying strong gains was a group of so-called lottery stocks this column profiled in July, though those ranks included WeWork (WE), which may head to zero ... which is why they're called lottery stocks.

You'd probably not expect the bearish strategist Mike Wilson of Morgan Stanley to be impressed, and guess what, he wasn't.

"We think last week's rally in stocks was mainly a function of the fall in back-end Treasury yields," says Wilson. And that drop, he said, was driven more by lower-than-expected coupon issuance and weaker economic data than anything Jerome Powell said. Continuing claims are now up more than 35% from the cycle trough, and the unemployment rate is up 0.5% from its lows, which have been important thresholds in past cycles.

Wilson notes that earnings revision breadth is still in negative territory. "This year's earnings recession continues to play out, particularly at the stock level. This is one key reason why broader indices and the average stock's performance within the S&P 500 have been weaker this year," he says. And the weak economic data only bolster the bank's view that the earnings recession is not yet over.

So what happens now? For asset owners and allocations, the prospect of adding additional risk at current levels is less attractive than fixed-income alternatives. "We think this group is more likely to be sellers into strength at this point," he says.

In all, Wilson says the rally should "fizzle out over the next week or two" as it becomes clear the growth picture doesn't support either Fed cuts or a significant acceleration in earnings per share growth.

Bolstering the view on the Fed side -- Barclays is still calling for another Fed rate hike, though in January instead of December.

The market

After the biggest week for the S&P 500 SPX in close to a year, a gain of 5.9%, U.S. stock futures (ES00) (NQ00) nudged higher. The yield on the 10-year Treasury BX:TMUBMUSD10Y was rising again. Crude-oil futures (CL.1) traded higher.

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The buzz

Berkshire Hathaway (BRK.B) released results over the weekend that showed the Warren Buffett-run company with a $157 billion cash pile.

Tesla (TSLA) CEO Elon Musk reportedly told staffers in Germany the vehicle maker will produce a low-cost car there.

South Korea reinstated a short-selling ban, sending shares of companies including Posco (KR:005490) (PKX) higher. The iShares MSCI South Korea ETF EWY rose 6%.

Ryanair (RYAAY) shares jumped as the airline proposed its first dividend.

The Fed's senior loan officer survey comes out at 2 p.m. Lisa Cook, a Fed governor, is due to speak at 11 a.m.

Best of the web

Ken Griffin criticizes proposals to clamp down on trade his firm is making.

WeWork bankruptcy would deal another blow to New York office market.

Trump and allies plan to punish critics and opponents should he win a second term.

Top tickers

Here were the top stock-market tickers as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   AMC     AMC Entertainment 
   NVDA    Nvidia 
   NIO     Nio 
   AAPL    Apple 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AMZN    Amazon.com 
   MULN    Mullen Automotive 
   MSFT    Microsoft 

The chart

From a new research paper by Robert Barro of Harvard University and Francesco Bianchi of Johns Hopkins University, this shows the impact of government spending on inflation. The spending variable is general government primary spending to GDP, divided by the ratio of gross public debt to GDP and the estimated duration of debt. "We show that, unlike monetary policy going back to the early 2000s, the large recent fiscal interventions related to the COVID crisis 'succeeded' in generating high inflation," the authors say.

Random reads

Here was House Speaker Mike Johnson's answer to the question of why he doesn't list having a personal bank account on his public disclosure forms.

Colonel Sanders cursed this team for 38 years.

The "loneliest sheep" in the U.K. has been rehomed, so naturally people are angry about it.

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-Steve Goldstein

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11-06-23 0844ET

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