Morgan Stanley Strategist Suggests Cutting Back on Stocks

Morgan Stanley Dean Witter & Co. global investment strategist Robert J. Pelosky Jr. on Monday recommended investors cut back their global stock holdings and add to bonds and cash, saying that pressures building in world financial markets are the worst in two years.

The big brokerage’s model portfolio now is 68% in stocks, 21% in bonds, 6% in cash and 5% in alternative assets such as real estate, Pelosky said.

The previous recommendation: 72% stocks, 18% bonds, 5% cash and 5% alternative assets.

Pelosky also lowered his recommendation for holding stocks of European companies and Asian companies outside of Japan.

“I continue to be worried about the downside risk to stocks even though stocks have corrected over the last couple of months,” Pelosky said in an interview.

Brokerages’ recommended portfolios, and changes they make in individual asset weightings, are meant to convey their sentiment about the general direction of markets in the near term.

Pelosky said the U.S. blue-chip Standard & Poor’s 500 index, down 10% year to date, will probably keep falling until “sometime mid-to-late next year.”

“The crosscurrents buffeting world financial markets seem more severe than at any point since the [hedge fund] Long-Term Capital Management crisis of 1998,” Pelosky wrote in a note to clients.

Growth in the U.S. and global economies is slowing, and the outlook for corporate earnings growth is weakening and will likely keep slowing through at least the first half of next year, Pelosky said.

Estimated global average earnings growth of more than 25% this year will probably slow to 8% to 10% next year, he said. “That’s a dramatic decline, and that’s one of the reasons we find it hard to see how equities are going to do well, particularly when you couple that with the high price-to-earnings multiple that world equity markets continue to trade at,” he said.