In recent months, there was a release of pent-up demand by consumers, fueling a rapid recovery. As this euphoria fades, defensive stocks will outperform relative to the broader market, according to Morgan Stanley.
Analyst Michael Wilson named five reasons why he believes defensive stocks are a smart move for investors.
1. Consumer Overconsumption: [/size][size=20]There is no denying the U.S. is seeing a strong reopening and pent-up demand for pandemic-restricted activities, such as dining out, which will likely continue to benefit from spending, said Wilson in a Monday note.
Industries that positively correlated with stay-at-home orders, such as home improvement and general merchandise, saw a pull-forward in demand that will likely degrade in the near term, the analyst said.
2. Disposable Income is Low: June's retail numbers came in higher than expected, leading to a logical conclusion that pent-up demand for in-person shopping experiences will continue to drive discretionary spending, he said. This view does not account for disposable income levels, Wilson said.
Since the last round of stimulus checks, personal disposable income has fallen, according to Morgan Stanley. Consumer spending is trending alongside disposable income, indicating June's retail sales numbers are "likely the last in a long series of above-trend consumption data points," the analyst said.
3. Inflation Worries Crowding Out Consumers: June's University of Michigan Consumer Survey saw record levels of inflationary worries regarding home and vehicle prices, said Wilson.