Morgan Stanley turns neutral on defensive sectors

Morgan Stanley is out with a new call recommending investors lock in their gains on defensive stocks (XLV, XLU) as they tend to underperform in the month following the Federal Reserve's first interest rate cut.

Catalysts Hosts Seana Smith and Madison Mills report more on the call and break down how the upcoming labor market data could impact investors' defensive plays.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video transcript

After Morgan Stanley was out with a call on this, recommending investors lock in their gains on defensive stocks.

Investors who had been anticipating an economic downturn have been flocking to sectors more immune to a recession.

Now, Morgan Stanley, as Mike Wilson is pointing out that defensive tend to underperform in the month after a fed's first rate cut.

We've actually heard this from some of our strategists here over the last couple of trading days and we did see a huge build up in some of these defensive pleas ahead of the fed's decision to cut.

So of course, question is what the valuations are right now with the valuations are a little bit too pricey if we may become a little bit too far, too fast.

He's, he's talking about the importance of the next jobs print and maybe that is going to give us a little bit of a better idea as to what the future looks like for this group.

Yeah, an important context.

Of course, for most of us know, Mike Wilson typically very bearish.

He just recently turned a little bit more positive on stocks for 2024.

Given the out performance that we've seen kind of pushing his hand there.

Do you want to mention the city basket of defensive stocks is up about 11% just since the end of June, that outperforms the broader cyclicals index.

But Mike Wilson saying it's time to take profits off that recent out performance because like you said, Shaw, a lack of clarity about what the job market in the labor market data could look like if the data, you know, is horrible, that could be a boost for defensive could make it look like we're heading towards a recession.

But if it's great, that could be bad for defensive.

So while we wait for that clarity better to just take some profits.

According to Wilson here.