Last week’s news of weakening consumer confidence bodes ill for the stock market, according to Morgan Stanley.
“We remain more concerned about growth than most, and Friday's consumer confidence number should not be overlooked in that regard,” wrote Morgan Stanley strategists led by Michael Wilson. The stock market’s correction remains incomplete, they said.
The University of Michigan’s preliminary consumer sentiment index fell to a 10-year low of 61.7 in February from 67.2 in January.
The market’s focus for most of last week centered on inflation and the Federal Reserve, but “we think it marks a top in the market's obsession with the Fed and rates,” Wilson said.
Meanwhile, “many strategists and investors will likely chalk up Friday's weak equity market to risk” of a war in Ukraine, Wilson said. But, “we think ignoring the extraordinarily weak consumer confidence number would be a big mistake,” he said.
It’s not that a Russian invasion of Ukraine doesn’t matter, Wilson said. But the consumer-confidence number “materially increases the odds of a polar vortex for the economy and earnings,” he said.
“We continue to see depressed consumer sentiment, high prices and negative real wage growth posing a risk to consumption in the first half of this year.”
If this doomsday scenario doesn’t come to pass, “we'll just experience a colder than normal winter and spring,” Wilson said.
“If we're wrong and growth reaccelerates, then markets can find some footing, but it will also allow the Fed and other central banks to keep going hard until they likely slow things enough to get inflation back near its goal of 2% to 3%, a long way from here.”
To be sure, Morgan Stanley isn't completely bearish on stocks. "We have chosen to own large-cap quality stocks with more of a defensive posture, rather than high growth due to the greater derating risk in the latter group," Wilson wrote.
Stocks on Morgan Stanley's "Fresh Money Buy List" include:
AT&T (T), Exxon Mobil (XOM), Humana (HUM), Mastercard (MA,) McDonald's (MCD), Mondelez (MDLZ), SBA Communications (SBAC), Simon Property Group (SPG), Synchrony Financial (SYF) and Welltower (WELL).
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