(Bloomberg) - Surging prices for everything from gas to food and rent has crushed sentiment among American consumers. For Morgan Stanley’s Andrew Slimmon, that makes it a good time for investors to pile into companies that cater to them.
Slimmon, US equity portfolio manager at Morgan Stanley Investment Management, says the 26% selloff in consumer-discretionary stocks since the beginning of the year has put the group on sale, even as the Federal Reserve ratchets up its battle against runaway inflation. Some of these sectors such as home apparel, home furnishing and home building are poised to outperform the broader market, he said, especially if price-gains start to slow and the economy can avoid a recession. He declined to name specific firms.
“In that environment, you don’t want to own defensive stocks that have already done very well,” the senior portfolio manager said in an interview. “You want to start to buy some of the stocks that are down dramatically year-to-date.”
Consumer shares have been under pressure all year, underperforming the S&P 500 which fell 17%, as the Fed aggressively raised interest rates and companies contended with margins crimped by surging prices that ate into demand. That’s a contrast to years of easy money and government spending that had padded Americans’ bank accounts. Investors have bid up shares in companies that perform better in times of slowing growth at the expense of the consumer-oriented stocks whose performance is more closely linked to the economy.
US consumer confidence slipped in July to the lowest level since February 2021 on gloomier outlook for the economy amid persistent inflation. The Conference Board’s index edged lower for a third month to 95.7 from a downwardly revised 98.4 reading in June. The median forecast in a Bloomberg survey of economists called for a decline to 97.
For Slimmon, the beat-down in consumer sentiment has gone far enough to warrant betting on a turnaround.
“There’s a very low expectations in those stocks right now. What if the direction of change is actually higher for consumer sentiment?” he said. He views the risk-reward as attractive. “Those stocks might recover dramatically because they’re down so much.”
He plans to snap up shares “well into the weakness” in August, which is among historically the worst months for equities as volumes are thin and workers are on vacation.
Stock market moves during this period are usually dominated by macro events. “The macro story this year is not very good,” he said, citing a global geopolitical crisis and the lack of an August meeting among Fed officials. “The focus of the market shifts from what ultimately long-term drives stocks, which is earnings. And when the shift goes to other things like macro events that creates volatility.”
As for those areas he will likely stay away from, he offered two sectors.
“If you think about what’s worked year-to-date on a relative performance basis, there are two groups that have really done well: energy and defensives,” he said. “It’s a little late to be selling the energy stocks. They’ve been so creamed. I wouldn’t be aggressively buying those stocks.”
Slimmon also thinks inflation in the US has likely seen its peak. “It’s possible,” he said by phone. “The money supply peaked a year ago, and there’s a year lag between the money-supply growth and inflation.” He expects inflation will begin to come down this fall.
This, however, doesn’t necessarily mean the Fed will completely pivot or pause its aggressive monetary policy tightening, he said. But an easing inflation figure, he said, will reduce market anxiety.
(Expands on role and updates sector move in second paragraph, adds details on market performance in fourth.)
By Isabelle Lee
