Sell Any Post-SVB Stocks Bounce, Says Morgan Stanley

(Bloomberg) — Morgan Stanley’s Michael Wilson, known for being one of Wall Street’s most bearish strategists, recommended that investors sell any rebound in US stocks that may result from regulators’ support measures after the collapse of Silicon Valley Bank.

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“We suggest selling any bounces on a government intervention to quell the immediate liquidity crisis at SVB and other institutions until we make new bear market lows, at a minimum,” Wilson wrote in a note on Monday.

The strategist — who correctly predicted the selloff in stocks last year and the rebound in October — said the collapse of SVB and closure of Signature Bank make clear the impact of the Federal Reserve’s policy tightening. While he doesn’t see a wider systemic issue similar to that encountered during the 2008 global financial crisis, especially with US authorities backstopping deposits at troubled lenders, he sees the downfall of these banks as likely having a negative effect on economic growth.

The positive effect from the American regulators’ overnight support actions quickly evaporated on Monday morning, with stocks signaling that fallout from the incident is far from over. S&P 500 futures erased most of their earlier gains and traded just 0.4% higher, with the underlying benchmark getting close to wiping out this year’s advance. The so-called VIX Volatility index spiked, set for the highest since end-October.

First Republic Bank remained under pressure, with shares plunging 70% in US premarket trading even after the lender moved to try and quell concern about its liquidity after the failure of SVB. PacWest Bancorp lost more than 40%, Western Alliance Bancorp sank 30%, Charles Schwab Corp. dropped about 20% and Zions Bancorp NA fell 15%. Comerica Inc. slid 7%.

Morgan Stanley’s Wilson said he expects the trend of depositors pulling money from traditional banks and piling into higher-yielding securities to continue, unless lenders raise deposit rates. This would in turn lead to lower profits and likely a reduced supply of loans, he said.

“Rather than a random or idiosyncratic shock, we view last week’s events as just one more supporting factor for our negative earnings growth outlook,” Wilson wrote. “In short, Fed policy is starting to bite, and it’s unlikely to reverse even if the Fed were to pause its rate hikes or quantitative tightening — i.e., the die is cast for further earnings disappointments relative to consensus and company expectations.”

He expects tighter credit availability from banks to weigh on small-cap stocks more significantly.

–With assistance from Michael Msika.