As markets move toward the close of the year, growth stocks with excessively high valuations in the equity market continue to be Wall Street’s heftiest risk, according to Morgan Stanley.
Chief U.S. Equity Strategist Michael Wilson wrote in a weekly report to clients that the brokerage still prefers defensive, reliable stock choices and a more selective bent in general as investors look to 2020.
“We still think the greatest risk in the equity market remains in growth stocks where expectations are too high and priced,” Wilson wrote. “From a sector standpoint, this is consumer discretionary broadly and expensive software and secular growth stocks.”
“Focus on what you own, not how much,” he added.
Wilson’s admonishes investors to steer clear of consumer discretionary stocks, after equities rallied on Friday to finish the week on a high note.
Though the market’s internal performance may not seem critical at first, with stocks close to all-time highs, the composition of equity outperformance reveals that the analysts may be starting to pull back a bit in such an expensive environment.
“Since the Fed began cutting, [discretionary and other growth stocks]have underperformed the S&P 500 and appear to be breaking down on a relative basis,” Wilson wrote. “Importantly, these groups underperformed on Friday when the market was up and earlier in the week when the market was down.”
“Despite a big rally in stocks, we continue to position our overweights / underweights away from growth and toward the more defensive parts of value (Staples, Utilities and Financials),” he added.
Wilson said that banks are his hedge against better-than-expected growth given that rates could rally. On the flip side, if growth disappoints, the Fed might be tempted to cut the overnight lending rate against and the yield curve could steepen and help widen lending margins.
For investors looking at defensive plays in the Staples, Utilities and Financials using ETFs, the Vanguard Consumer Staples ETF (VDC ), the Utilities Select Sector SPDR Fund (XLU ), and the SPDR S&P Regional Banking ETF (KRE ) are all places to consider allocating funds.
This article originally appeared on ETFTrends.com.