Leading investment bank Morgan Stanley (NYSE: MS) is warning that July’s stock rally is coming to a close and that the worst market selloff of the year is fast approaching.
In an analyst report, Morgan Stanley said that the July stock rally has now exhausted itself and risks to global stock markets are building. The bank concludes that the three-day market slide that started last Thursday will likely only get worse in coming weeks and months.
"The selling has just begun and this correction will be the biggest since the one we experienced in February," Morgan Stanley equity strategists led by Mike Wilson wrote in a note Monday. "It could very well have a greater negative impact on the average portfolio if it’s centered on tech, consumer discretionary and small caps, as we expect."
Morgan Stanley pointed to recent earnings misses from such stock market darlings as Netflix (NASDAQ: NFLX) and Facebook (NASDAQ: FB) as warning signs that the momentum in the markets has now shifted to the downside. Indeed, the NASDAQ Composite Index fell 1.3% in New York on Monday, bringing its three-day slide to 3.7%. The measure sank almost 10% from a January high through February 8.
Some below-the-surface moves are setting the market up for a bigger downturn. One of the more curious developments since the reporting season began has been lagging value stocks -- those priced cheaply to their assets.
Typically, strong earnings reports spur investors to bid up underpriced stocks. However, a market-neutral version of value has tumbled for the past three weeks. Value stocks in a Bloomberg index outperformed growth stocks by 1.8 percentage points Monday, poised for the biggest gap since 2016.
However, the current concerns go beyond the day-to-day gains and losses among value stocks. Correlations between all investment factors are on the rise, according to Morgan Stanley, increasing systematic risk for active investors. Linkages may only continue to tighten as the earnings season concludes and investors pay more attention to global threats.
