Morgan Stanley's Mike Wilson, one of Wall Street's most skeptical strategists, is advising clients to dump growth stocks and buy defensive names as the "demand destructive" tariffs are fanning recession fears.
Wilson, the firm's chief U.S. equity strategist, sees defensive bond proxies outperform growth names by another 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 on 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 … 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 said.
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 clients put his views to work by putting on a pair trade of short the Nasdaq 100, which contains many secular growth names, and long the S&P 500. And Wilson 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.