Morgan Stanley says the charts suggest we're in a bear market, so buy these quality defensive stocks

Published Mon, Feb 14 202210:10 AM ESTUpdated Mon, Feb 14 20223:09 PM EST

Morgan Stanley's Michael Wilson, one of Wall Street's biggest bears, said the market's technical picture still looks ominous, while worsening economic data and geopolitical tensions are making the environment all the more challenging. "Technicals suggest we're still in a bear market," Wilson, Morgan Stanley's chief U.S. equity strategist, said in a note. "Unfortunately, as we see it, the technical picture has broken down and does not look ready to reverse." The strategist looked at the 50- and 200-day moving averages for the Russell 2000 and the Nasdaq 100 , which appear broken as they are trading well below their respective 200-day moving averages with a negatively sloping 50-day. The stock market has suffered a steep sell-off, with the tech-heavy Nasdaq Composite dipping into correction territory, or falling more than 10% from its recent high. A bear market calls for a 20% decline or more from a closing 52-week high. The stock rout came as inflation surged to a fresh four-decade high , leading investors to believe that the Federal Reserve will act more aggressively to tighten monetary policy. "At a minimum, we see all of the major averages taking out January's lows given the lack of any positive divergences on that initial sell off," Wilson said. Wilson has been calling for a significant pullback in stocks, and he set the S & P 500 's year-end target at 4,400. That's the lowest forecast among all the major Wall Street strategists, according to the CNBC Market Strategist Survey . His target is slightly below S & P 500's Friday close of 4,418.64. Wilson said investors overlooked a disappointing reading of the University of Michigan Consumer Sentiment Index last week, which registered the lowest reading since 2011 largely due to high prices combined with lower real income and household net worth. "We continue to see depressed consumer sentiment, high prices, and negative real wage growth posing a risk to consumption in the first half of this year," Wilson said. "The S & P 500's disproportionate weight toward consumer goods vs. consumer services makes this more of a market risk than an economic one, at least for now." The strategist is also warning about the increased tensions between Ukraine and Russia that sent oil spiking and led investors to dump risky assets. A potential Russian invasion "materially increases the odds of a polar vortex for the economy and earnings," Wilson said. A spike in energy prices "would destroy demand, in our view, and perhaps tip several economies into an outright recession." Still, even though Wilson's overall outlook sounds pessimistic, there are still buying opportunities in the market, particularly in high-quality defensive names. "We have chosen to own large cap quality stocks with more of a defensive posture rather than high growth due to the greater de-rating risk in the latter group," Wilson said. The stocks in Morgan Stanley's Fresh Money Buy List have outperformed the S & P 500 by 500 basis points in 2022. Exxon Mobil , SBA Communications and Synchrony Financial were highlighted on the Wall Street firm's list, with analysts calling for a 20% rally or more in the next 12 months. The list also includes Simon Property Group . The mall operator has been a classic reopening bet, and the stock has fallen 11% this year. AT & T, Mastercard and McDonald's were also among the quality defensive stocks that Morgan Stanley thinks investors should own right now.

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