These could be the biggest headwinds for consumer stocks
Writing in a strategist note, Morgan Stanley CIO Mike Wilson believes a multitude of factors, including "slowing consumer spend" and student loan repayments, are presenting risks for consumer-facing stocks. This leads Wilson's team to advise investors to avoid early cycle winners.
Yahoo Finance's Seana Smith and Brad Smith analyze how consumer discretionary stocks could be expected to react to these forecasts.
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Video Transcript
SEANA SMITH: The Morgan Stanley's Mike Wilson, well, he's warning that consumer stocks, they could lose their shine as risks continue to grow here for the sector. Now, in that note, Wilson naming slower consumer spending, student loan repayments, higher gas prices, and a tough housing market. That could all add up to major headwinds for the consumer discretionary sector.
His team suggesting that investors avoid some of those early cycle winners, think housing, small caps, and instead, he's advising investors to focus on large cap defensive growth, and later cyclical winners like energy and industrials. And Brad, one of the lines that stuck out to me within this note is what he had to say just about performance, and how we're starting to see some of that performance break down within the sector. When we take a look at some of the consumer discretionary stocks, 44% of the stocks are trading below their 200 day moving average.
So he's making the case that then points to continued weakness going forward.
BRAD SMITH: Yeah. And we got to remember which companies really make up this sector as well. It's companies like Tesla. It's like Amazon, and that all being included in consumer discretionary stocks, it's gained 26% this year. But, again, let's remember that this has been a bounce back off of a dismal 2022 for the sector overall.
So all of this considered, one of the huge things to continue to watch out for is where the consumer in some of their spending, especially in the fourth quarter of this year, signals any signs of a pullback or any signs of antsiness given the fact that we still have many economists that are trying to evaluate to the best of the possibility whether a soft landing is firmly priced in, or whether that is firmly the actual scenario that will come to fruition, or whether the consumer will show some other signs of a sharper decline, at least in perception or sentiment, of the overall economic landscape, and thus pull back more tremendously on their spending.
And if businesses, if you will also see that cascade into some of the business spending as well here. So those two of the ways to look at this, but some names, just to throw on your radar with regard to this that other companies have also raised issue with Jefferies talking about Foot Locker, Urban Outfitters and Nike, they have all downgraded been downgraded from that firm, citing some of the similar characteristics that are showing up slowing consumer spend, student loan, reinitiation, or repayment being restarted soon as well October 1 here.
SEANA SMITH: And Goldman Sachs also joining that chorus. They're saying that they expect consumer, discretionary sector to underperform the S&P by 7 percentage points over the next 12 months. So certainly we are seeing more and more strategists here on the street. Caution and really warn just about the upcoming performance that we could see or lack thereof of the consumer discretionary sector.
