Buy the dip has failed. Here’s what investors need to do next, says Morgan Stanley.

A risk-off Monday is brewing to start the week, with stock futures lower and the 10-year yield edging back toward 1.5%.

And we’ll get jobs numbers at the end of the week that are expected to be strong, and the Federal Reserve will definitely be watching. So a jittery market is understandable.

Our call of the day comes from Mike Wilson, chief investment officer at Morgan Stanley, who offers a bucket of reasons to stay defensive on this market.

“Large-cap quality leadership since March is signaling what we believe is about to happen — decelerating growth and tightening financial conditions. The question for many investors now is whether the price action has already discounted these fundamental outcomes. The short answer, in our view, is no,” said Wilson, in a Sunday note to clients.

Wilson’s list of reasons includes China growth problems that will likely stem from troubled property giant Evergrande (more on that below) — not completely priced into it. And then there’s the surprising speed at which the Fed expects to be done tapering — by mid next year — a “clearly hawkish shift.” The subsequent market fallout — bonds and yields up, equities down — is telling, he said.

“In short, higher real rates should mean lower equity prices. Secondarily, they may also mean value over growth even as the overall equity market goes lower. This makes for a doubly difficult investment environment given how most investors are positioned,” he said.

One last defensive signal came from a surprising challenge recently to that “buy-the-dip” strategy — “the most powerful offset to a material correction in the S&P 500 this year,” said Wilson.

“After the Evergrande dip and rally, stocks have probed lower and taken out the prior lows, making this the first time that buying the dip hasn’t worked, simultaneously violating important technical support,” he said, providing the following chart.

Morgan Stanley/Bloomberg

As for what to do with all this, Wilson said the team has favored a “barbell” of defensive sectors — healthcare and staples that should hold up as earnings revisions start to see pressure from decelerating growth and rising costs. Add financials, which benefit from a rising interest-rate environment.

Consumer discretionary stocks, meanwhile, are “especially vulnerable to a payback in demand from last year’s overconsumption.” In that realm, Wilson likes services over goods for pent-up demand remaining, while some tech stocks are at risk from a work-from-home dynamic that’s fading. Semiconductors are the biggest worry, he said.

The buzz

A busy enough week of data starts with factory orders later, and ends with payroll numbers. Economists are expecting a big jump for September, of around 485,000, after August fell well short.

More Fed troubles? Vice Chair Richard Clarida traded stocks just ahead of a central bank statement about the pandemic, Bloomberg reported.

shares are getting a bump from record delivery numbers — 241,300 vehicles — in the three months ending in September, ahead of 139,593 a year ago and above forecasts, the electric-car maker said Saturday.

While Chinese mainland markets are closed until Friday, Hong Kong’s Hang Seng Index
fell 2.1% as shares of troubled China Evergrande
were suspended after it said it may sell its property-management unit.

By mid 2022, we may need a new vaccine to fight COVID mutations, said Uğur Şahin, CEO and co-founder of vaccine maker BioNTech

A Facebook
whistleblower said the company prematurely switched off safeguards designed to stop political disinformation, after last year’s presidential election, paving the way for the deadly Capitol Hill riots in January.

Further on China, U.S. Trade Representative Katherine Tai is expected to say China hasn’t complied with a Phase 1 trade deal reached under former President Donald Trump’s administration, in a speech on Monday.

The global elite has been hiding billions in properties, yachts and other assets for years, according to the “Pandora Papers” report by the International Consortium of Investigative Journalists.

Read: With supply-chain disruptions here to stay, these are the best places to invest

Check out MarketWatch’s new podcast: Best New Ideas in Money, where MarketWatch head of content Jeremy Olshan and economist Stephanie Kelton talk to business, tech and finance leaders about the next phase of money’s evolution. Listen here.

The markets

U.S. stock futures


have downshifted, led by tech. The yield on the 10-year Treasury
is up 2 basis points to 1.487%. European stocks are flat. On the energy front, natural-gas prices
are up about 3.5%. Oil markets will be watching the OPEC+ meeting, with Reuters reporting that the group will stand by an existing deal to add 400,000 barrels a day of oil in November.

The chart

The Wolf Street blog examined detailed second-quarter Fed data on the wealth of households for the 1%, 2%, “next 40%” and “bottom 50%”, that were released Friday. The conclusion is that Fed policy, the blogger said, has “blown out the already gigantic wealth disparity during the pandemic.”

More: “It wasn’t households in general that benefited, but only the richest households with the most assets. The more assets they had, the more they benefited,” said the blogger.

Here’s another look at that:

Random reads

Scientists who figured out how we feel and touch temperature win the Nobel Prize.

One little known secret ingredient to candy corn — bug shellac.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.

Next Post

The SEC just approved the closest thing to a US bitcoin ETF you can buy, for now | Currency News | Financial and Business News

Chesnot/Getty Images The US SEC has approved an ETF that tracks stocks with significant exposure to bitcoin. These firms hold a majority of their net assets in bitcoin or derive a majority of their profit or revenue from bitcoin-related activities. The actively-managed fund, Volt Crypto Industry Revolution and Tech ETF, […]