Risks rising for US consumer stocks: Morgan Stanley analyst
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CONSUMER stocks, one of the brightest corners of the market this year, are about to lose their shine as risks build for the sector, according to Morgan Stanley’s Michael Wilson.
The faltering rally is in keeping with the view of Morgan Stanley economists that household spending probably can’t sustain the surprising strength of the first three quarters, the strategist said.
Assigning an equal weighting to members of the consumer discretionary sector shows performance is breaking down, while 44 per cent of stocks trading below their 200-day moving average also points to a weakness, Wilson wrote in a note.
“This price action is picking up on slowing consumer spend, student loan payments resuming, rising delinquencies in certain household cohorts, higher gas prices and weakening data in the housing sector,” he noted.
US consumer discretionary stocks, a group that includes Amazon.com and Tesla, have gained 26 per cent this year, double the 13 per cent advance in the S&P 500. That outperformance hit a wall last week, when the sector tumbled more than 6 per cent in rough trading for risk assets as the Federal Reserve signalled interest rates will be higher for longer in the fight against inflation.
Wilson is not alone in souring on the sector. Goldman Sachs Group analysis shows that on an equal-weight basis, the consumer discretionary sector will underperform the S&P 500 by seven percentage points over the next 12 months. Moreover, Jefferies Financial Group analysts downgraded retailers Foot Locker, Urban Outfitters and Nike on expectations that US consumers are set to curb spending.
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The Morgan Stanley strategist – whose bearish outlook on stocks is yet to materialise this year – said that investors should avoid rotating into early-cycle winners like consumer cyclicals and housing-related as well as interest-rate sensitive sectors, and small caps.
Instead, his team recommends balancing large-cap defensive growth with “late-cycle” cyclical winners like energy and industrials.
Meanwhile, JPMorgan Chase strategist Mislav Matejka said that defensives can outperform into the end of the year and recommends a less-negative call on mining and energy sectors. BLOOMBERG
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