Morgan Stanley says sell stocks - should you?

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Was the recent run-up in the stock market a sign that stocks have hit rock bottom, or a suckers' rally which raised the hopes of investors naive enough to think that good times were coming only to shoot them down like a nerdy guy at a dance club?

Judging from today's300-point decline in the Dow Jones industrial average, it seems that the pessimists carried the day. Worries about Treasury Secretary Timothy Geithner's comments about banks needing additional capital and lingering concerns about a potential bankruptcy of one or perhaps even two automakers certainly did not help matters.

"When you're looking for excuses to sell off, certainly those sorts of things are realistic worries. We may well go back and test the lows." said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages $22 billion, in an interview with Bloomberg News.

The stock market had its biggest drop in three weeks. In a note today, Morgan Stanley Chief Strategist Jason Todd argued that the good times were not looming.

"In the rush to buy a cyclical recovery, it seems earnings or valuations no longer matter," Todd said in a note to clients. "We simply do not believe that the market has completely priced in the prospect of further earnings weakness or that it will, without interruption, look through this weakness to recovery."

Some investors believe that Todd's view of the market is too pessimistic.

Hank Smith, chief investment officer of Haverford Investments, told DailyFinance that investors expect corporate profits and the economy will remain weak.

"We think that it is more than adequately priced into the market," Smith said. "In our view we are starting to see signs that we are at or near the trough of the economy. We think that its reasonable that we will see positive GDP numbers in the fourth quarter."

Investors punished the stock market because they were disappointed by what they saw as a slow pace of action from the Obama administration. But Smith pointed out that the market does move when there is an announcement of a new policy.

"The earnings reports for this quarter are already going to be horrific but that was priced in the market," Smith said. " There is definitely still a fair amount of fear."
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