Michael Wilson: Stocks Have Entered The "Death Zone"

By Michael Wilson, Chief US Equity Strategist at Morgan Stanley

Jon Krakauer’s Into Thin Air chronicles one of the deadliest years on Mount Everest, when 12 mountaineers died trying to scale the highest peak on earth. The story reveals both the best and the worst traits of people as many of the climbers try to reach the summit without proper regard for the risks. While scaling Everest has some highly technical aspects, the most dangerous feature is its sheer size. The peak is 3,000 feet above the start of the “death zone” – the altitude at which oxygen pressure is insufficient to sustain human life for an extended period. Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents.

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. More specifically, either by choice or out of necessity investors have followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to climb into a region where they know they shouldn’t go and cannot live very long. They climb in pursuit of the ultimate topping out of greed, assuming they will be able to descend without catastrophic consequences. But the oxygen eventually runs out and those who ignore the risks get hurt.