“There is the potential for an earnings recession, which means you have a few quarters of negative earnings growth,” said Mike Wilson, chief US equity strategist at Morgan Stanley, who believes the sell-off could continue through the year-end. “The risk of something like this happening increases.”
Of course, wild cards could turn the market around. Positive news about Covid treatments or cases can generate excitement, as can Merck’s announcement of an antiviral pill to treat Covid-19 on Friday. Washington could agree on more spending, which could offset the slowdown in growth.
Mr Wilson also said he is closely monitoring retail investor behavior. The millions of retailers who flooded the stock market over the past year have helped keep stocks rising. Market falls were met with a rush of traders eager to “buy the dip” – but that was not the case in September.
Katie Melanson, who works in the insurance industry and lives outside of Seattle, has seen her trading profits shrink from about $ 20,000 to $ 12,000 in recent years. And she’s not buying yet.
“I just keep it in cash,” said Ms. Melanson, 27. “I think there’s a little more of it to fall.”
Last year, she said, she made about 56 percent profit on her brokerage account. “Of course it was great when everything went up, up, up” said Mrs. Melanson. “It was definitely a disappointment to see it go down.”
Morgan Stanley’s Wilson believes these new investors’ reaction to the disappointment could help determine how fast the market turns.
“We got a lot of new participants last year because Covid and the people are at home and have some money in their pockets,” he said. “You learn, like all of us, that the markets rise – and fall. “