Morgan Stanley analyst Michael Wilson, one of the bearish analysts on Wall Street, has advised investors to sell potential uptick in US equities that would occur due to regulatory assistance actions taken in the wake of Silicon Valley Bank’s failure.
On Sunday, the Federal Reserve, the US Treasury, and Federal Deposit Insurance Corp moved in to ease these concerns by announcing that deposits at the bank are guaranteed, and customers can access their deposits.
Morgan Stanley strategies advise investors to sell following VB’s collapse
Wilson said in a note to investors that until the markets hit new lows, it is advisable to sell any rebounds on government interventions to ease the current liquidity problems the SVB is facing alongside other institutions. Wilson’s call came as SVB’s collapse shook the investment community, with concerns increasing regarding a financial crisis and more bank runs.
In October last year, Wilson accurately forecasted the stock’s selloff. He believes that SVB’s fall and Signature Bank’s closure are an indication of the impact of the Fed’s tightening policy. Although the United States government is backing up deposits at distraught lending institutions, Wilson does not see a larger systemic problem comparable to that experienced during the worldwide financial meltdown of 2008. Still, he believes that the failure of these financial institutions will have a negative impact on economic expansion.
On Monday morning, the benefits of the American policymakers’ overnight support efforts swiftly faded, with stocks indicating that the incident’s long-term effects are still being felt. Most of the S&P 500 futures’ gains early in the day were wiped out, with the benchmark trading at 0.4% up, almost erasing its year-to-date gains. In addition, the ‘VIX Volatility Index’ increased and reached its highest level since the end of October last year.
Lenders were bleeding on Monday as pressure increases
Notably, the First Republic Bank continued to face pressure, dropping almost 70% premarket despite the lender’s attempts to alleviate liquidity concerns following SVB’s drop. In addition, other lenders lost considerably, with Western Alliance Bancorp losing 30%, PacWest Bancorp dropping 40% and Charles Schwab Corp and Bancorp NA dipping 20% and 15%, respectively.
Wilson added that unless lenders increase deposit rates, he anticipates the pattern of customers withdrawing funds from conventional banks and investing them in higher-yielding investments to persist. He explained that, as a result, fewer loans would likely be available and lesser revenues.
The Morgan Stanley strategist said that the past week’s events are among the elements that confirm the research firm’s expectation of weak earnings growth and not some random or atypical shock. Generally, the Federal Reserve policy is beginning to bite, and that will not stop even if there is a suspension of the rate increases or changes in tightening policy. As a result, the odds are stacked against further profit shocks compared to consensus and corporate expectations.
Wilson predicts that the lenders’ depressed credit availability will have a greater impact on small-cap equities.