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Warning: Morgan Stanley says the stock market may have peaked for 2018

January’s record stock market highs may have been the market top for 2018, according to analysts at investment bank Morgan Stanley. The investment house believes that the combination of rising volatility and declining investor sentiment will make it difficult for stocks to eclipse their January peak this year. Both the S&P 500 and the FTSE 100 indices hit record highs in January, before falling sharply in early February.

We think January was the top for sentiment, if not prices, for the year,” Mike Wilson, Morgan Stanley’s chief US equity strategist wrote in a note to clients earlier this week. “With volatility moving higher we think it will be difficult for institutional clients to gross up to or beyond the January peaks. Retail sentiment indicators also look to have peaked in January and we do not see anything on the horizon to get retail investors more bullish than they were following a tax cut. Tax cuts were the event to capture investors’ imagination, but the reality is that the market had been pricing tax legislation in for months, if not quarters.”

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Bearish assessment

That’s no doubt a fairly bearish assessment. Given that we’re only in March, it could be a long year for investors if markets continue to trend downward or sideways for the remainder of 2018.

However, it’s worth pointing out that market movements are notoriously hard to predict in the short term. So while Morgan Stanley’s call could turn out to be accurate, the prediction could also be off the mark. Plenty of other investment managers such as Credit Suisse, BlackRock and JP Morgan are more bullish in their views of the market after the recent correction. But of course, realistically, no one can truly predict how markets will fare for the rest of the year.

Dealing with volatility

One thing we can be sure of is that 2018 is likely to be more volatile than 2017. Last year was an exceptionally peaceful one for global markets, and that tranquillity was never going to last forever. 2018 is likely to be considerably more uncomfortable for investors.

Yet a challenging year is not the end of the world. Market volatility is a completely normal part of market behaviour. And the stock market can still perform well when it is in a turbulent mood. For example, 2013 was a relatively volatile year for the FTSE 100, with the market falling heavily in May and June, however, the index still returned over 14% for the year.

Investors should remember that volatility can create opportunities. Right now, the share prices of many high-quality FTSE 100 companies are much cheaper than they were in early January. Similarly, there are some amazing dividends yields on offer at present that weren’t available in January.

When volatility is high, the key is to average into the market over time and invest with a long-term investment horizon. This is likely to result in investment success in the long run.

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