Morgan Stanley Analysts Warn Investors Not To Buy Stocks Yet After The SVB Depositor Rescue

On Wall Street, a flat to slightly lower start is expected, but oil prices are in the red, gold is up greatly, and oil prices are under pressure as well. Wall Street, on the other hand, is expected to see oil prices over the coming week fall as well as gold prices increase.

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In regards to recent events on US shores, the failure of three U.S. banks represents a symptom of a long-running predicament, according to the economist. Ahead of this week's interest rate decision, the Fed will be in an even deeper hole and this makes the decision especially important," writes Mohamed A. El-Erian, chief economist at Allianz.

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We now turn to Morgan Stanley's chief U.S. equity strategist Mike Wilson whose call for the day tells us exactly what the rescue package for bank depositors in the U.S. does not entail - it does not signify any quantitative easing.

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As a result of the events of the past week, equity market participants now have a much more difficult time obtaining credit across a broader swathe of the economy, which may have the effect of convincing market participants that the equity risk premium (ERP) is quite low," Wilson adds.

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Stocks aren't worth the risk, he says since Treasury bonds and high-grade bonds provide investors with more bang for their buck.

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With this acknowledgment, Wilson points out that the S&P 500 is currently valued at 220 basis points. "We have been waiting for this acknowledgment because it will provide us with a real buying opportunity," he said. We believe the risk/reward ratio in U.S. equities remains unattractive until the ERP is at least 350-400 basis points.

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Wall Street gained last week due to an erroneous interpretation of government actions, according to Wilson. In our view, it was a result of some clients' belief that the Fed/FDIC bailouts of depositors are quantitative easing (QE) and provide a catalyst for stock prices to climb," he said.

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Although the Fed's recent increase in reserve levels reliquefied the banking system, Wilson pointed out that it did not create new money that would flow into the economy or markets beyond a few hours or days.

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In the end, the Fed lends, not buys. "When the Fed buys security, it expands the balance sheet of the seller, which makes leverage ratios more binding. This is not the case in this instance," Wilson said. "When the Fed buys a security, it expands the seller's balance sheet."

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According to the Fed's weekly balance sheet released on Wednesday, the bank lent out $308 billion to depository institutions, an increase of $303 billion from the previous week. Wilson said that money is unlikely to transmit to the overall economy as it would with normal bank deposits since part of it was primary credit via the discount window, and part was loaning to bridge banks.

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Rather, Wilson believes the overall velocity of money in the banking system is likely to fall sharply in the coming years, and we believe that any increase in reserves will more than offset any fall in this velocity, especially given that these funds are temporary or emergency in nature."

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“This weekend, the Federal Reserve and the Federal Deposit Insurance Corporation put in place a backstop for uninsured deposits that will help to prevent further major bank runs, but it will not alleviate the existing tight lending standards within the banking industry from getting even tighter. Additionally, it will not prevent deposit costs from rising, which will cause net interest margins to suffer. Overall, the likelihood of a credit crunch has increased significantly," he stated.

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This is a reminder that Morgan Stanley's strategist, nicknamed "worried Wilson," won plaudits from Wall Street for correctly predicting the stock and bond sell-off in 2022, which was the worst year for the S&P 500 in more than a decade. His outlook for 2023 is one of the most pessimistic on Wall Street, with the index expected to finish at 3,900.