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- Consumer stocks will be under pressure in the coming quarter, Morgan Stanley warned.
- That's because Americans are getting battered by high gas prices, housing costs, and student loans.
- Economists have warned the weakening consumer could help push the economy into recession.
Consumer stocks — a group that includes some of the market's best-performers this year — are facing major downside risk over the next quarter as Americans get battered by high gas prices, student loan payments, and expensive housing, according to Morgan Stanley chief investment officer Mike Wilson.
Wilson warned of pressure ahead for the consumer discretionary sector as Americans feel the pain of still-high inflation and pull back on spending. Consumer spending is likely to slow through the rest of the year, Wilson said, predicting real Personal Consumption Expenditures would shrink over the fourth quarter and be followed by a "muted recovery."
That's largely due to consumers' depleted savings: Lower-income households have likely "completely exhausted" any excess cash held on from the pandemic, according to Morgan Stanley economists, while middle- and higher-income consumers are growing stingier with discretionary purchases.
Excess savings have fallen around 47% from their peak as of December, which will likely drop 66% from their peak by the end of next year, the bank's economists warned.
"The technical/breadth set-up for consumer stocks looks particularly challenged around current levels," Wilson and his team of strategists said in a note on Monday. "We believe this price action is picking up on slowing consumer spend, student loan payments resuming, rising delinquencies in certain household cohorts, higher gas prices, and weakening data in the housing sector."
Other economists have warned of increased pressure on the American consumer in the coming quarter, which could serve as a major headwind for stocks. Student loan borrowers are set to resume payments in October, which is bound to weigh on budgets.
Gas prices, meanwhile, just hit their highest summertime level in over a decade as crude inches closer to $100 a barrel. Then there's housing. Housing costs have shot back up to near-record levels, with the median monthly mortgage payment clocking in $2,605 in July – just $32 away from the all-time-high, Redfin data shows. Meanwhile, median asking rent prices notched $2,052 last month, just $2 away from the all-time record.
Wilson and is among the most bearish of stock market prognosticators at the moment, having previously warned investors of one of the worst earnings recessions since 2008 to hit the market. He urged investors to buy up large-cap defensive growth stocks, like energy and industrials as opposed to consumer cyclical, housing related, small-cap, or interest-rate sensitive stocks.