Markets

Morgan Stanley: Investors should short growth stocks, get defensive as 'recession fears emerge'

Key Points
  • Morgan Stanley chief U.S. equity strategist Mike Wilson sees defensive bond proxies outperform growth names by 10%.
  • "At the end of a growth scare when recession fears emerge, secular growth stocks typically underperform defensives," Wilson says.
  • He says the new round of tariffs are consumer-focused and are "demand destructive."
Recession hinges on the labor market: Morgan Stanley's Mike Wilson
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Recession hinges on the labor market: Morgan Stanley's Mike Wilson

Morgan Stanley's Mike Wilson, one of Wall Street's most skeptical strategists, is advising clients to dump growth stocks and buy defensive names, saying "demand destructive" tariffs are fanning recession fears.

Wilson, the firm's chief U.S. equity strategist, sees defensive bond proxies outperforming growth names by 10% as the U.S.-China trade war weighs on consumer sentiment, which adds to a long list of recessionary indicators that are already flashing red.

"At the end of a growth scare when recession fears emerge, secular growth stocks typically underperform defensives," Wilson said in a note to clients Monday. "Slowing job creation and slowing hours worked, stock market volatility and new tariffs are all potential weights on consumer spend."

Tariffs on $112 billion of Chinese goods kicked in on Sunday. This round of duties target many everyday grocery items and household staples, which could cost the average American household $1,000 a year, J.P. Morgan estimated. The tit-for-tat tariff threats roiled the stock market in August with the Dow Jones Industrial Average suffering its worst month since May. The bond market also repeatedly flashed its biggest recession warnings amid the trade war escalation.

"Since the consumer is 70% of the economy, the overall impact on the economy could be greater for this round," Wilson said. "Keep in mind that last year's first round of tariffs happened when companies were still enjoying a massive profits/margin windfall from the tax cuts. With that windfall now gone, the ability to eat the tariffs is much lower today."

Wilson, who called the earnings recession this year, said previously the U.S. economy could fall into a recession if the country's trade war keeps escalating.

He is recommending a pairs trade of shorting the Nasdaq 100, which contains many secular growth names, and betting on the S&P 500. Wilson also says investor should go long defensive stocks. The firm's buy list includes Disney, Coca-Cola, NextEra Energy and Procter & Gamble.

Morgan Stanley has a mid-2020 price target for the S&P 500 at 2,750. The benchmark closed Friday's trading at 2,926.46.