Morgan Stanley says stocks shouldn't be rebounding, but retail investors keep buying

Published Mon, Oct 18 202110:19 AM EDTUpdated Mon, Oct 18 202111:00 AM EDT

Individual investors are steadfast in buying the dip in equities — despite apparent macroeconomic issues — and the broader market won't pull back until the retail group turns bearish, according to Morgan Stanley. Retail investors are committed to buying equities, especially on down days. The firm noted that the correlation of buying to negative price action is strong. "Retail proves resilient and buys the dip once again, forcing many institutional investors who share our fundamental views to cover and chase," Morgan Stanley chief U.S. equity strategist Mike Wilson told clients Monday. The major averages have had a rocky few months as investors grow concerned about inflation, supply chain bottlenecks, Federal Reserve tapering and growth in China. However, the S & P 500 is roughly 1.6% off its record high. Wilson believes that the major averages have warranted a bigger decline recently as supply chain issues, cost pressures and earnings revisions cause fundamentals to deteriorate. However, amateur investors continue to buy stocks and ignore the risks. "Meanwhile, earnings revisions are deteriorating but not fast enough to cause a bigger decline in the broader indices, yet. The bottom line — until these flows subside or reverse, the index will remain elevated even as the fundamental picture deteriorates," Wilson added. Wilson questioned if perhaps the retail buying spree is a way to hedge inflation. "Stocks offer protection against that rise to some degree and so we may finally be witnessing the 'Great Rotation' from bonds/cash to stocks that has been predicted so many times in the past," he said. 'Confidence is everything' Morgan Stanley said its business conditions index is foreshadowing a further deterioration in the Purchasing Manager Indices, which typically correlate with equity markets. "Meanwhile, consumer confidence also remains shakier than one might think given their propensity to buy the dip," Wilson said. "This divergence between markets and confidence must be resolved over the next few months one way or another." The Wall Street firm is calling for investors to prefer consumer services over consumer goods. For that reason, Morgan Stanley added McDonald's to its Fresh Money Buy List. "MCD top line has performed well in the US during the Covid-impacted period, key international markets that were heavily impacted in '20 are now in recovery mode, and future sales drivers across markets are becoming more visible," Wilson said. "As a franchised model, direct cost exposure is lower and larger check sizes continue to support margins vs. pre-Covid while pricing is being used to partially offset cost inflation at the store level," he added. — with reporting from CNBC's Michael Bloom.

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