Equity Markets to extend the correction another 10% – Morgan Stanley

FXStreet reports that action by Congress and the Fed, and its absence, has paved the way for the recent downturn in equities, putting markets back on a more sustainable footing, Chief Investment Officer at Morgan Stanley Mike Wilson explains.

“It looks like Congress is having a difficult time coming to terms on the next round of fiscal stimulus. It's not that either side is unwilling to spend more money, it's how much and where does it go. What that really means is both sides want to make sure they get credit from voters in November. But markets are impatient and are likely to exert pressure on Congress to get the deal over the goal line, which may take a few more weeks. The unfortunate and unexpected passing of Supreme Court Justice Ginsburg is also likely to further cloud this ongoing negotiation.”

“While all equities are long-duration assets depending on ten-year yields, expensive growth stocks with cash flows further out in the future are the most vulnerable to rising back end rates. Compounding that risk is the fact that many of these stocks became overpriced in August on the view that long-term rates were never going higher. This is why the Nasdaq has underperformed so much in this recent correction and is likely to continue until the stocks reflect this risk of higher long term rates. I estimate that's another 10% downside from here for major equity markets and perhaps 15% for the Nasdaq.”