Morgan Stanley tells clients to be 'skeptical' about buying the Trump dip

Morgan Stanley told clients to stay on the sidelines during the sell-off driven by Donald Trump's upset win in the U.S. presidential election.

A team of strategists at the bank said investors would need more time to determine whether Trump, a Republican, ends up being more pro-growth or more protectionist before buying.

"The 'surprise' result will encourage investors to protect still-reasonable YTD gains, and await more clarity about the new president's cabinet and policy priorities," the report said. "We would be skeptical about buying the dip."

The S&P 500 was up almost 5 percent for 2016 through the end of trading Tuesday. The Trump win tanked stock futures overnight and sent safe havens like gold and Treasurys soaring.

Futures rallied off their lows significantly, however, as Trump said in his victory speech that he wanted to unite the nation. The volatile trading was evidence that investors need more clarity from the president-elect before they can get comfortable buying equities for the long term.

The Morgan Stanley report said:

"An undivided government gives President-elect Trump scope for policy transformation. We see him having the motive and opportunity to act in two key areas: tax reform and trade protections. The question for investors is as simple as it is uncertain: Will his pro-growth policies (tax reform and fiscal stimulus) be undone by anti-growth impulses to restrict trade and immigration?"

When the sell-off eases, Morgan Stanley strategists said they would be buyers of drug and bank stocks on lower regulatory risk under Trump and a Republican Congress.

Another group could get a boost on his pledge to rebuild America, a theme he reiterated in his victory speech.

"Infrastructure and defense stocks are already showing solid and improving trends and are a key overweight for our U.S. equity strategists. We expect fiscal policy size to be favorable over the medium term, although a more protectionist trade policy might create some challenges," said the Morgan Stanley report.