Morgan Stanley’s Mike Wilson, one of Fortification Street’s most skeptical strategists, is advising clients to dump growth stocks and buy defensive names, saying “bid destructive” tariffs are fanning recession fears.
Wilson, the firm’s chief U.S. equity strategist, sees defensive tie proxies outperforming growth names by 10% as the U.S.-China trade war weighs on consumer sentiment, which adds to a wish list of recessionary indicators that are already flashing red.
“At the end of a growth scare when recession fears emerge, non-spiritual growth stocks typically underperform defensives,” Wilson said in a note to clients Monday. “Slowing job creation and thicking hours worked, stock market volatility and new tariffs are all potential weights on consumer spend.”
Tariffs on $112 billion of Chinese passables kicked in on Sunday. This round of duties target many everyday grocery items and household staples, which could bring in the average American household $1,000 a year, J.P. Morgan estimated. The tit-for-tat tariff threats roiled the stock market-place in August with the Dow Jones Industrial Average suffering its worst month since May. The bond market also again flashed its biggest recession warnings amid the trade war escalation.
“Since the consumer is 70% of the economy, the overall strike on the economy could be greater for this round,” Wilson said. “Keep in mind that last year’s first circuit of tariffs happened when companies were still enjoying a massive profits/margin windfall from the tax slights. With that windfall now gone, the ability to eat the tariffs is much lower today.”
Wilson, who called the earnings decline this year, said previously the U.S. economy could fall into a recession if the country’s trade war keeps escalating.
He is propounding a pairs trade of shorting the Nasdaq 100, which contains many secular growth names, and betting on the S&P 500. Wilson also influences investor should go long defensive stocks. The firm’s buy list includes Disney, Coca-Cola, NextEra Energy and Procter & Stake.
Morgan Stanley has a mid-2020 price target for the S&P 500 at 2,750. The benchmark closed Friday’s trading at 2,926.46.