Many commentators point to the S&P 500 near all-time highs as a rationale for higher stock prices. However, economists at Morgan Stanley think markets may be facing a bumpy road ahead and warn of a potential 20% drawdown in the S&P 500.

“We’ve been suggesting a 10-15% correction in the S&P 500 is inevitable. However, given how long this has taken to play out, the drawdown could end up being closer to 20% if the growth slowdown ends up being worse than normal. Therefore, we continue to think investors should hunker down a bit more than normal and skew portfolios toward defensive quality rather than large cap growth quality.”

“Of course, markets can surprise us. First on the list is another fiscal stimulus directed right at the consumer that sustains the well above trend of demand. This could come from either the US or China. Second would be a Fed that completely reverses course this week and says they no longer plan to taper asset purchases this year or even next year. Both seem unlikely at this stage, but if markets become somewhat dislocated, we could then see a reaction from policymakers later this fall.”

Read More