Buy the dip failed. Here’s what investors need to do next, says Morgan Stanley.

The week starts with a risk-free Monday, with lower stock futures and a 10-year return climbing back towards 1.5%.

And we’re going to get strong numbers by the end of the week, and the Federal Reserve will definitely be watching. So a nervous market is understandable.

Our Call of the day comes from Mike Wilson, Chief Investment Officer at Morgan Stanley, who cites a number of reasons for staying defensive in this market.

“The quality leadership in large-cap companies since March signals what we believe will happen soon – a slowdown in growth and a tightening of financial conditions. For many investors the question now arises whether price movements have already devalued these fundamental results. The short answer from our point of view is no, ”Wilson said on a Sunday note to customers.

Wilson’s list of reasons includes growth problems in China, likely stemming from ailing real estate giant Evergrande (more on that below) – not fully factored in. And then there is the surprising speed with which the Fed expects the throttling to be a “clearly restrictive postponement” by the middle of next year. The subsequent impact on the market – bonds and yields rise, stocks fall – are instructive, he said.

“In short, higher real rates should mean lower stock prices. Second, even when stock markets are falling, they can mean value over growth. This creates a doubly difficult investment environment considering how most investors are positioned, ”he said.

One final defensive signal came from a surprising challenge to this buy-the-dip strategy recently – “the biggest offset to a major correction in the S&P 500 this year,” said Wilson.

“Following the Evergrande dip and rally, stocks have looked down and broken previous lows. This is the first time the Dip purchase has not worked and at the same time hurts critical technical support, ”he said, providing the graphic below.

Morgan Stanley / Bloomberg

On what to do with all of this, Wilson said the team preferred a “barbell” from defensive sectors – healthcare and staples that should hold up when earnings revisions come under pressure from slowing growth and rising costs. Add financial stocks that benefit from a rising interest rate environment.

Consumer discretionary stocks, meanwhile, are “particularly vulnerable to demand repayment from last year’s overconsumption.” In this space, Wilson favors services over goods to meet the pent-up demand, while some tech stocks are at risk from declining work-from-home momentum. Semiconductors are the biggest concern, he said.

The buzz

A busy week of data starts later with factory orders and ends with payroll numbers. Economists expect a big jump of around 485,000 in September after August fell significantly short.

More Fed Problems? Vice Chairman Richard Clarida was trading stocks shortly before a central bank statement on the pandemic, Bloomberg reported.

Tesla TSLA,
-0.03%
Stocks are getting a boost from record deliveries – 241,300 vehicles – in the three months ended September, 139,593 a year ago and above forecasts, the electric automaker said on Saturday.

While mainland China markets are closed until Friday, Hong Kong’s Hang Seng Index has HSI,
-2.19%
fell 2.1% as shares of troubled China Evergrande 3333,
-3.91%
was suspended after it announced it would sell its property management unit.

We may need a new vaccine to fight COVID mutations by mid-2022, said Uğur Şahin, CEO and co-founder of vaccine maker BioNTech BNTX.
-6.67%.

A Facebook FB,
+1.07%
Whistleblower said the company prematurely removed safeguards to prevent political disinformation after last year’s presidential election and paved the way for the deadly riot on Capitol Hill in January.

Turning to China, US Trade Representative Katherine Tai is expected to say in a speech on Monday that China failed to adhere to a phase 1 trade deal under the administration of former President Donald Trump.

The global elite has been hiding billions in real estate, yachts and other assets for years, according to the Pandora Papers report by the International Consortium of Investigative Journalists.

Read: Given supply chain disruptions, these are the best places to invest

Check out the new MarketWatch podcast: Best New Ideas in Money, where MarketWatch Head of Content Jeremy Olshan and economist Stephanie Kelton talk to business, technology and finance executives about the next phase in the evolution of money. Listen.

The markets

US stock futures ES00,
-0.30%

JM00,
-0.25%

NQ00,
-0.41%
downshifted, led by tech. The 10 year Treasury TMUBMUSD10Y return,
1.479%
is up 2 basis points to 1.487%. European stocks are flat. On the energy front, natural gas prices are NG00,
+ 2.92%
have increased by around 3.5%. Oil markets will be watching the OPEC + meeting, with Reuters reporting the group will stand by an existing deal to add 400,000 barrels of oil a day in November.

The graphic

The Wolf Street blog examined detailed Fed second quarter data on household wealth for the 1%, 2%, “next 40%” and “bottom 50%” released Friday. The bottom line is that Fed policy, the blogger said, “inflated the already gigantic wealth gaps during the pandemic”.

More: “It was not households in general that benefited, but only the richest households with the highest wealth. The more wealth they had, the more they benefited, ”said the blogger.

Here’s another look at it:

Random reads

Scientists who found out how we feel and touch temperature are awarded the Nobel Prize.

A little-known secret ingredient for sweet corn – beetle shellac.

Need to Know starts early and updates until the opening bell, but sign up here to have it delivered to your email inbox one time. The email version will be sent around 7:30 a.m. Eastern.

Do you want more for the coming day? Sign up for The Barron’s Daily, a morning investor briefing that includes exclusive commentary from Barron’s and MarketWatch writers.

.

Leave a Comment