Stocks have had a stellar start to 2019, and they’ve made a huge recovery since they almost tumbled into a bear market just two months ago. But Morgan Stanley’s chief US equity strategist says investors shouldn’t get too comfortable.
“The market is still not convinced we are out of the woods on growth concerns,” Michael Wilson said in a recent client note.
The dramatic turnaround for stocks began the day after Christmas, stoked by rising optimism about the global economy, hope that the US and China are getting closer to solving their trade fight, and looser financial conditions after the Federal Reserve took a more patient stance on interest rates.
The S&P 500 has soared almost 18% since its Christmas Eve bloodbath took it to the brink, including a gain of more than 10% so far in 2019.
“Rarely, if ever, have we witnessed such a dramatic reversal of returns in back to back months,” Wilson wrote.
Wilson says investors are reading the situation correctly, and he wrote that the global economy will hit a low point in the next few months and then start to recover.
But his entire point comes with one large caveat: The ongoing short-term rally has been led by expensive and relatively volatile high-growth stocks, and that could become a problem if investors start to lose confidence.
If that sounds familiar, that’s because it’s the exact same risk-taking behavior that doomed markets in late 2018.
“Cyclicals and expensive growth stocks are high beta and both have performed well year-to-date in what has been a broad beta rally,” he wrote. “As such, both are now vulnerable to a market correction should one ensue.”
If investors look a little further, Wilson says, they’ll also see that traditionally defensive stocks are still the best performers dating back to the market’s recent high on September 20 — another development that troubles him.
He views it as a sign of worry on Wall Street. While tech and other high-growth areas are doing well, investors are still holding on to safer picks.
In terms of what investors can do, Wilson says he’s keeping his highest ratings on more defensive stocks including utilities and household products makers. He said that investors might zero in on stocks that could benefit from better economic growth, but still have some defensive qualities like a higher dividend yield.