Strategists Foresee U.S., European Stock Drop

U.S. and European stocks could drop 15% to 20% in the next several months, and the decline is likely to drag Asian markets lower as well, strategists at Morgan Stanley Dean Witter & Co. warned Tuesday.

The firm raised the cash weighting in its “Macro Navigator” model portfolios and reduced its exposure to U.S., European and Asian stocks, according to a report by investment strategist Robert J. Pelosky.

“Our concerns have grown that the strong December move in most major markets, coupled with the growing signs of a more synchronous global economic recovery, leading to inflation fears and rising rates, have brought forward the likelihood of a correction in developed equity markets,” Pelosky wrote.

Drops of 20% would send the Dow Jones industrial average to 8,824, a level last seen in December 1998, and the Nasdaq composite to 3,334, about where it was as recently as Nov. 30.

Morgan Stanley said it still expects stocks around the world to outperform bonds in 2000, with U.S. stocks beating other markets. Japan is “the soundest of the major markets,” Pelosky wrote.