A Top Wall Street Analyst Thinks the Stock Market Is in a “Death Zone”: What Should Investors Do?

Many investors eagerly desire a reason to be optimistic. That’s why you’ve heard a lot of talk about the potential for a new bull market beginning. Such hopes aren’t completely unrealistic. For example, the Nasdaq Composite Index has risen close to 12% below its previous low. Another 8% or so would meet the threshold for a new bull market to be declared.

However, there’s still a lot of pessimism. One top Wall Street analyst even thinks the stock market is in a “death zone.” What should investors do if he’s right?

An image of a bear on a sign above another sign that states "stock market" with dark clouds in the background.

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A death zone?

Morgan Stanley chief U.S. equity strategist Mike Wilson recently compared U.S. stock valuations to the “death zone” sometimes encountered by mountain climbers. These death zones are areas below the summits of tall mountains, where little oxygen is available.

Wilson wrote, “This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade.” Continuing with the analogy, he suggested that “it’s time to head back to base camp before the next guide down in earnings.”

In Wilson’s view, any hopes of a new bull market forming in the near term are futile. He wrote, “The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming.”

What’s next for the stock market? Wilson thinks the S&P 500 could fall to 3,000 — roughly 25% below its current level. 

Is this pessimistic outlook on target?

Wilson isn’t the only bear on Wall Street. Bank of America Chief Economist Michael Hartnett suspects the Federal Reserve could raise interest rates more aggressively than earlier predictions. He predicts that the S&P 500 will slide over the next few weeks.

JPMorgan Chase‘s Mislav Matejka is also concerned about the Fed’s actions. Matejka doesn’t think stocks will bottom out until interest rates begin to come down. That could take quite a while.

Some recent developments lend support to this pessimism. The strong jobs report in January could lead the Fed to believe the U.S. economy is still too hot. Inflation also remains stubbornly high. It seems likely these factors will cause the Fed to continue raising interest rates. That could, in turn, increase the likelihood of a recession.

However, not everyone is as negative as Wilson, Harnett, and Matejka. For example, Wharton Professor and Economist Jeremy Siegel thinks the odds are now higher that the U.S. economy can avoid a recession. That could bode well for the stock market.

What should investors do?

Perhaps the best thing investors can do is follow the old Boy Scout motto: “Be prepared.” The unsaid part of that motto is that you should be prepared for whatever might unfold.

One way to be prepared is to invest in recession-proof stocks. Stocks that tend to hold up well during major economic downturns should be safer picks during uncertain times. There are plenty of candidates. I especially like the stocks of drugmakers whose products will enjoy steady demand regardless of economic or market conditions.

Another course of action is to build your cash stockpile. That’s what Warren Buffett appears to be doing. And he knows a thing or two about smart investing strategies.

However, the most important thing investors should do is to adopt the long-term mindset that Buffett has demonstrated throughout his career. Wilson and the other bearish Wall Street analysts could be right that the stock market will decline in the coming weeks and months. But over the long term, stocks are arguably the best way to make money. Don’t view the current environment as a “death zone.” See it for what it really is — an opportunity zone.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Keith Speights has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and JPMorgan Chase. The Motley Fool has a disclosure policy.