The U.S. stock market has been partying all throughout July, and a hangover is coming.
That is according to analysts at Morgan Stanley, who said that Wall Street’s rally is showing signs of “exhaustion,” and that with major positive catalysts for trading now in the rearview mirror, there’s little that could continue to propel equities higher.
“With Amazon’s strong quarter out of the way, and a very strong 2Q GDP number on the tape, investors were finally faced with the proverbial question of ’what do I have to look forward to now?’ The selling started slowly, built steadily, and left the biggest winners of the year down the most. The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February,” the investment bank wrote to clients.
The decline “could very well have a greater negative impact on the average portfolio if it’s centered on tech, consumer discretionary and small-caps, as we expect.”
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A correction is technically defined as a decline of at least 10% from a recent peak. Both the Dow Jones Industrial Average DJIA, -0.57% and the S&P 500 SPX, -0.58% corrected in early February, on concerns that inflation was returning to markets. While the Dow remains in correction territory—meaning it hasn’t yet risen 10% from its low of the pullback—the S&P exited just last week, following its longest stint in correction territory since 1984. The Nasdaq Composite Index COMP, -1.39% never fell into correction.
Equities have done well of late, with the Dow up 4.3% in July. The S&P 500 has gained 3.1% in the month while the Nasdaq has advanced 1.6%, hitting multiple records along the way, though it has stumbled badly in the past three sessions.
Read: After a strong July, August looks ominous for stockshttps://www.marketwatch.com/story/prepa ... 2018-07-30