Morgan Stanley warns of a possible bear market in the US

US Federal Reserve raises interest rates 1:03

(CNN Business) --

Stock markets are in a turbulent time, and Morgan Stanley is warning clients that things are about to get worse.

Investors have "very few places to hide" in the markets right now, and even safe-haven stocks have succumbed to pressure in recent days, Morgan Stanley equity strategists led by Mike Wilson wrote on Monday.

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"The market is under so much scrutiny, it's unclear where the next turn will be," Wilson wrote.

"In our experience, when that happens, it usually means that the overall index is about to drop sharply with almost all stocks falling in unison."

Morgan Stanley says the backdrop "suggests" the S&P 500 will enter a downtrend, marking a 20% decline from previous highs.

Recent selling could support the view that markets are entering a "much broader sell-off phase," according to the bank.

US stocks fell sharply last week – including a nearly 1,000-point drop in the Dow on Friday alone – on concerns about aggressive moves by the Federal Reserve to rein in soaring inflation.

Including Monday's losses, the S&P 500 is down about 12% from record highs reached in early January.

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The S&P 500, the broadest gauge of US stocks, has been in an uptrend since late March 2020, when the Federal Reserve came to the rescue with unprecedented support amid the deep recession caused by the covid pandemic. -19.

However, the Nasdaq entered a downtrend in early March as oil prices soared and inflation fears mounted.

Morgan Stanley said investors are buying into the Fed's "fire and ice" narrative of an overheated market and economy set to cool dramatically.

The final chapter, Morgan Stanley said, is a "rapid Fed tightening just before a slowdown."

Others are more optimistic about the risks that inflation poses for the stock market and the economy.

"Inflation should ease from current levels, and we don't expect a recession from rising interest rates," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note to clients on Monday.

Indeed, some economists are hopeful that inflation may finally be at or near its peak.

Morgan Stanley shares that opinion, although the bank does not see it as a positive thing.

Instead, he says that the easing of inflation will be accompanied by a slowdown in GDP, sales and earnings growth, all of which are negative for stocks.

"While others have been using this as a bullish argument," Morgan Stanley wrote, "we would like to send out a clear warning: be careful what you wish for."

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