Investors should load up on defensive sectors like consumer staples as macro data sends mixed signals about the economy, Morgan Stanley says

The most recent macro data is causing some confusion, according to Morgan Stanley. The data suggests both a “no landing” and a “soft landing” scenario for the economy. In response, the bank is recommending that investors focus on defensive sectors like consumer staples to navigate through any volatility.

Analysts at Morgan Stanley, led by CIO Michael Wilson, believe that the upcoming April CPI data on May 15 will be crucial in shaping the Federal Reserve’s next move and influencing the market. They emphasize that the reaction to this data will likely be more important than the data itself, given the current uncertain economic environment.

Wilson points to a mix of stronger-than-expected data from the Employment Cost Index and ISM manufacturing and services indexes, along with disappointing numbers from nonfarm payrolls and consumer confidence indicators. Based on this, Wilson suggests investing in robust cyclical stocks in a no-landing scenario and premium growth stocks in a soft landing scenario. He also recommends considering adding exposure to defensive sectors like utilities and staples in case business activity slows down further.

In light of recent developments, Wilson’s team notes that many companies are focusing on providing value to customers in anticipation of a potential pullback in consumer spending. They prefer investing in staples over discretionary stocks in the current late-cycle environment for added portfolio defensiveness.

The analysts also point out conflicting signals from the recent Federal Reserve meeting, where Chairman Jerome Powell expressed uncertainty about the timing of the initial rate cut but ruled out the possibility of a rate hike. Overall, the uncertain macro data and economic environment are prompting investors to be cautious and consider defensive strategies in their investment decisions.