Monday, July 23, 2007

Morgan Stanley predicts 14% correction next month

From the Telegraph (via DealBreaker):
A study by the bank found that credit spreads began to widen on average six months before every stock market correction of 10pc or more over the past 20 years.

The current widening began in February, picking up speed over the past three weeks. If history is any guide, this could point to a global stock market slide as soon as August. Morgan Stanley's model suggests a 14pc fall, or 2,000 points off the Dow.

"This is not the first time that equity markets take their time to react to bad news," said the bank's chief Europe strategist, Teun Draaisma. "The fundamentals have deteriorated. Equities have reached all-time highs despite higher rates, wider spreads, higher oil, Chinese tightening, and a stronger euro.

"There is a widespread belief in continuation of good global growth without inflation. While we are not expecting a recession for another two to three years, we believe chances are high that this belief will be seriously tested soon."

A 15% correction in the S&P 500 brings it down to September 2006 levels (not adjusting for inflation or dividend yield). Bad, but not that bad, and if earnings continue to grow, then it's a buying opportunity.

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