Don’t reckon on stocks to rebound if inflation anxiety continues, according to Morgan Stanley.
With fee fears egging on Treasury rates, equities could be in for a disappointing few months as investors touch away from a “buy-the-dip” mentality.
“When inflation is very low, take up arm inflation has a positive impact on equity valuations,” wrote Mike Wilson, chief investment dick at Morgan Stanley. But “rising inflation expectation may no longer be a positive for assets weigh ups, especially if markets start to think inflation is coming ‘unhinged.'”
Stocks are in the bulls-eye of a sizable sell-off with the Dow Jones industrial average falling diverse than 450 points Monday, adding to a 3.5 percent descend the previous week. The S&P 500 fell 1.6 percent on the week’s cardinal day of trade, as the Cboe volatility index (VIX) — considered the market’s master fear gauge — hit multi-year highs.
Many strategists have hypothesized that the sell-off is the issue of several months of uninterrupted gains for equity markets, a correction to overpriced reviews and inflated assets. And with the yield on the 10-year Treasury note climbing inefficiently 40 basis points since the start of the year, investors may be in for a potholed ride.
For his part, Wilson is the single most bearish strategist on Screen Street, with a year-end S&P 500 target of 2,750, just 1 percent out of reach of its current level. He believes it may be time to shift equity exposure toward defensive old and away from cyclical sectors like technology.
Cyclical supply performance tends to follow the health of the overall economy, while defensive make available performance is generally resistant to external pressures.
“Technology does not look exceptionally good. In fact, it looks downright awful,” Wilson warned in his Monday note. “We perceived the bond proxies —Telecom, Utilities and Staples–were all significantly underperforming up to date revisions which led us to write a note two weeks ago suggesting these sectors could hurried back.”
Indeed, he added, that has happened with the cyclicals underperforming defensives by nearly 5 percent despite the fact that interest rates have be prolonged to rise.
Wilson downgraded the technology sector to equal-weight from overweight and highlighted weaker dispatch in semiconductor and software companies.
Chipmakers were some of the best-performing pedigrees in 2017, with names like Broadcom and Micron posting leave behinds of 17 percent and 66 percent respectively over the past 12 months. But 2018 has developed to be more turbulent for the tech companies, with Broadcom and Micron down 11 percent each once more the past month.
Wilson added that software and services friends like PayPal, Google-parent Alphabet and Activision Blizzard have also been lackluster in the history few weeks.
But Wilson’s thesis did favor some sectors.
He upgraded the utilities sector to overweight, arguing that the just out uptick in yields is unlikely to last. Utilities stocks, traditionally viewed as link proxies, could see upside if Treasury yields recede from their current highs.
“We are not believers in the sustainability of the level of yields,” Wilson explained. “As one of the sundry rate-sensitive equity sectors, and one that has certainly moved down as calculates have risen, we recommend going overweight utilities to play a upbraid retracement at some point in the not too distant future.”
But if rates testify their upward momentum, utilities can still find support in a revival in earnings revisions, according to Wilson. Utilities largely outperformed concluding week despite the rise in rates, posting a loss of 0.6 percent settled the past week versus the S&P 500’s loss of 3.8 percent.