The stock market is off to one of its worst starts ever this year, with the S&P 500 falling more than 20% year to date. It’s a rout that has left many investors wondering when they will be able to “buy the dip.”

Morgan Stanley Wealth Management’s Lisa Shalett says don’t hold your breath.

The chief investment officer believes stocks have more room to fall as many companies have yet to change their earnings forecasts after the Federal Reserve’s decision to increase the pace of its interest rate hikes earlier this month.

“We don’t think the cyclical bear market can end until earnings are marked down, which makes profit reports for the second and third quarters critical,” Shalett wrote in a Tuesday research note.

By increasing rates, the Fed effectively increases the cost of borrowing across the economy, which should lead profits to drop as well, Shalett said.

She also noted that the odds of a recession hitting the U.S. economy this year have doubled in recent weeks to over 50%. For investors, that means the S&P 500 could drop another 10% from current levels, leaving the blue-chip index at a year-end value of 3,450.

Shalett isn’t predicting economic doom and gloom, however. She says that if the U.S. economy does fall into a recession, it will likely be a mild one.

“Based on our constructive assessment of the economy’s fundamentals, we see any potential recession as a shallow one, resembling the 1990–1991 experience,” Shalett said. “That’s because secular forces such as strong balance sheets, robust capital spending, a hardy labor market, and tight inventories in the most cyclical parts of the economy provide ballast.”

To sell or not to sell: Shalett’s advice

Despite dismal stock market returns for investors this year and consistent recession predictions, most wealth management teams have repeatedly recommended that their clients stay invested in equities and ride out the storm.

They argue, based on historical data, that remaining invested throughout stock market downturns can lead to better long-term returns than attempting to time market entries and exits.

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Now though, Morgan Stanley Wealth Management is striking a different tone. Shalett recommended her clients consider using current stock market losses to offset tax burdens on Tuesday. It’s a process called tax-loss harvesting where investors can sell losing positions in order to lower their overall tax burden from investing activities.

Shalett also said investors should protect their portfolios by pursuing “maximum asset class diversification,” a common defensive investing strategy.

Finally, in a separate June 22 note to clients, Shalett recommended investors look to investment grade bonds and select cyclical areas including small- and midcap stocks in biotech, financials, energy, and industrials in order to outperform the S&P 500 through the end of the year.

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