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       #Post#: 159--------------------------------------------------
       Why Morgan Stanley Loves Defensive Stocks as Market Rallies
       By: Khoa1221 Date: February 23, 2019, 1:56 pm
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       The U.S. stock market has rebounded smartly from its Dec. 2018
       low and the bulls anticipate continued gains, but Morgan Stanley
       is skeptical. "We have been vocal around the idea that we are in
       a bear market, an environment where defensives typically
       outperform," as their U.S. Equity Strategy team led by Michael
       Wilson writes in their most recent Weekly Warm Up report.
       "With the US equity market so overbought, fully valued and the
       beta trade somewhat overplayed at this point, we think it makes
       sense to keep our overweights on Utilities and [Consumer]
       Staples," the report adds. In fact, these two sectors are among
       those that have beaten their expected returns by the widest
       margins since Sept. 20, 2018, the date of the all-time record
       high close for the S&P 500.
       Morgan Stanley on the Defensive: Favorite Sectors
       (Outperformance vs. Expected Returns, 9/20/18 to 2/15/19)
       Consumer Staples: +2.46%
       Utilities: +6.48%
       Source: Morgan Stanley
       Significance for Investors
       Morgan Stanley computed expected returns, or projected
       performance, for all 11 sectors in the S&P 500, plus several
       industry groups within those sectors, based on their betas, or
       long-term correlations with the entire S&P 500. From the close
       on Sept. 20, 2018 to the close on Feb. 15, 2019, the S&P 500
       fell by 5.29%.
       Utilities should have dropped by 1.44% (implied beta of 0.27),
       but they rose by 5.04%, representing outperformance of 6.48%.
       For consumer staples, the expected return was a decline of 3.71%
       (implied beta of 0.70), but they fell by only 1.25%, for
       outperformance of 2.46%. Within consumer staples, household and
       personal products were the standout, with 12.18% outperformance.
       "Looking at industry group price reactions vs EPS revisions, we
       find that several defensively oriented groups (Household and
       Personal Products, Real Estate and Utilities) appear to be
       positive outliers on price vs revisions while negative price
       moves in Retailing and Tech Hardware appear to be overstating
       the severity of the downward revisions," Morgan Stanley says.
       These relatively subdued reactions of investors to recent
       earnings disappointments are part of the report's case for
       defensives going forward.
       "We think idiosyncratic factors and a generally defensive tilt
       to the market help explain these relationships," the report
       adds. Real estate beat expected returns by 8.19% in the period
       from Sept. 20 to Feb. 15.
       Among the leading Wall Street firms, for several months Morgan
       Stanley been the most bearish regarding S&P 500 earnings, and
       their latest base case forecast calls for profit growth at a
       mere 1% in 2019. *Our call for a Rolling Bottom is playing out.
       From the lows in December, the market has rewarded beta almost
       indiscriminately--the greater the beta, the greater the
       performance," they say. They project that the global economy
       will hit its own bottom in the first half of 2019.
       Looking Ahead
       Morgan Stanley has been leading the Wall Street pack in revising
       earnings estimates downward in recent months. If their bearish
       outlook is correct, a tilt towards defensives is a logical
       response. On the other hand, if the more optimistic forecasts of
       their rivals pan out, investors may miss significant upside.
       Further complicating the picture, research by JPMorgan finds
       recent historical precedents for stock market rallies in the
       face of plummeting earnings forecasts.
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