Sell Any Relief Rallies From Oversold, Tighter Financial Conditions, And Oil Price Headwinds

Morgan Stanley analysts this week told investors in a note to sell into any relief rally in the stock market due to a convergence of risk factors that include the U.S. Federal Reserve’s intention to raise interest rates to tame inflation and oil price headwinds due to the war in Ukraine.

In a note shared by analysts led by Mike Wilson, the bank said on March 7 that the Fed was unlikely to deviate from its stance on increasing interest rates this year. Analysts added that the contagion effect of the war in Ukraine sending oil prices higher globally could exacerbate the bear market further.

“Downside risk remains most acute over the next 6-8 weeks. We are firmly in the grasp of a bear market that is incomplete in both time and price,” Wilson and the team said in the note.

“We recommend staying defensively oriented by running less risk than normal and searching for companies with superior operational efficiency and earnings stability,” the analysts say, adding that “any relief should be sold.”

Inflationary pressure brought a ferocious rally in stocks to an end at the start of 2022 as investors developed jitters, nervous that central banks would start tightening their monetary policy aggressively.

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Russia’s invasion of Ukraine triggered another spike in commodity prices, adding to fears that economies are heading to a stagflationary shock.

Investors, taking their cues from spikes in the energy complex on worries the West would ban Russian oil exports, have been piling into safe-haven assets, pushing gold prices higher for the first time since September 2020.

On March 8, President Joe Biden banned oil imports from Russia as part of sanctions for the invasion of Russia.

Oil prices have risen to a level not even seen during the last financial crisis in 2008-2009, which Morgan Stanley analysts say is among the biggest risks as it will affect consumer spending negatively and cause a blow to stocks in the consumer discretionary sector.

Oil prices have jumped more than 30 percent since Feb. 24, touching $139 a barrel on Sunday. They were trading at around $107.30 at the time of this writing, according to Other western countries have imposed new sanctions on Russian energy exports. 

“The recent squeeze in oil prices puts even more pressure on consumer sentiment/spending intentions for durable goods which are already historically depressed,” Morgan Stanley analysts wrote. “We haven’t seen earnings cuts yet despite a host of risks…and the growing risk of excess inventory being built and ultimately having an adverse impact on pricing is not yet discounted.”

Photo: Gas prices are seen in front of a billboard advertising HBO’s Last Week Tonight in Los Angeles, Monday, March 7, 2022. The average price for a gallon of gasoline in the U.S. hits a record $4.17 on Tuesday as the country prepares to ban Russian oil imports. (AP Photo/Jae C. Hong)

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