- Morgan Stanley Wealth Management has told its clients
to “consider taking profits” in the consumer-discretionary
sector and has offered three alternatives. - Consumer spending contributes to more than two-thirds
of the US economy’s growth. - The firm’s investment committee said the economic boost
from tax cuts may be short-lived, and highlighted other trends
that could set back the American consumer.
The consumer-discretionary sector is the stock market’s best
performer of the last decade — but now it’s time to consider
taking profits, says Morgan Stanley Wealth Management.
The sector’s chart-topping performance on the S&P 500 is just
one reason for the recommendation offered by Lisa Shalett, the
head of investment and portfolio strategies, in a note on Monday.
Companies in the sector range from automakers to apparel makers
and casinos, which make goods and services that consumers splurge
on. Consumer spending contributes to more than two-thirds of the
economy’s growth.
And so, Shalett’s sector call further makes the case that the
backbone of the $20 trillion-plus US economy could be headed for
a slowdown.
It comes even as the US economy remains in recovery mode, with
growth in the second quarter rising at the fastest pace since
2014; a revision is due Wednesday. Consumer confidence in August
was the highest in 18 years, according to the Conference Board.
Retailers from Walmart to
Target reported strong second-quarter earnings.
Shalett doesn’t discount any of these signs, but says they may
not be telling the full story.
“The Global Investment Committee is skeptical, believing that
current expectations and stock valuations embed a continuation of
cycle peak trends when, in fact, we see the data rolling over,
headwinds strengthening and household balance sheets increasingly
stressed,” she said.
Shalett says consumer spending may lose its strength as the dual
benefits of tax cuts and increased fiscal spending fade. That’s
separate from the recent and specific data that’s of concern to
Morgan Stanley.
According to the
Tax Policy Center, a Washington, DC-based think tank, the tax
cuts would add 0.7% to US Gross Domestic Product this year, 0.4%
in 2021, and just 0.1% in 2026. After individual tax cuts expire
in 2027, the TPC doesn’t expect any economic boost.
For now, one trend that could put the brakes on consumption
growth is housing affordability, Shalett said.
A separate Morgan Stanley analysis recently showed
that Americans are forking out the most in
monthly mortgage payments relative to their incomes since
2008.
“At issue is that housing costs have outpaced growth in real
personal income, a situation that in the past has coincided with
a slowdown in consumer spending,” Shalett said.
The ratio of interest and principal payments as a share of
monthly income is at 22%, thanks to rising home prices and higher
mortgage rates. With the Federal
Reserve expected to continue
raising interest rates through next year at least, there’s no
short-term fix to the affordability problem in sight.
Another area of vulnerability is in how consumer-focused
companies respond to rising costs. These so-called supply chain
pressures include
higher freight costs, energy costs, and wages, which could
squeeze profit margins and be passed on to consumers.
“Consider taking profits in the consumer discretionary sector,”
Shalett said. “Focus on active managers and more defensive plays
in health care, consumer staples and utilities.”
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