Morgan Stanley (NYSE:MS) strategists are urging investors to snap up U.S. government bonds, even if the economy doesn’t slow down. They believe bond yields could fall dramatically driven by “residual seasonality,” a statistical quirk that can sway economic data even after seasonal adjustments. This could lead to predicting a more rapid decline in inflation than the market is currently pricing in, and three stocks to sell in light of MS’s prediction.
As bond yields fall, bond prices rise. However, the cooling of inflation can also adversely affect companies in different sectors of the economy. Reduced inflation makes sectors that range from energy to real estate less attractive, but it should be noted that residual seasonality should be part of a broader bearish thesis.
These three stocks to sell have residual seasonality to their original bear case, strengthening the decision to sell the stock.
Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM), one of the largest publicly traded oil and gas companies, may be vulnerable to shifts in energy prices influenced by global economic changes. While typically resilient during high inflation due to increased oil prices, a sudden shift to lower inflation could reduce its operating margins.
People typically buy stocks like XOM for their stability and high dividends. I believe that XOM could be headed for trouble given that the long-term future of the fossil fuels industry is subject to a massive change due to our transition to carbon-free alternatives.
XOM, therefore, isn’t one of those dividend stocks one can hold forever and forget about. Indeed, the consensus from five analysts suggests that XOM’s EPS will fall around the FY2027 mark, slipping into negative territory.
When comparing the outlook of XOM to other dividend stocks like Johnson & Johnson (NYSE:JNJ) or Lowe’s (NYSE:LOW), there is a far stronger confidence that its EPS will continue to climb steadily into the future, thus making XOM a riskier option and one of those companies that investors should consider selling.
Wells Fargo & Company (WFC)
Wells Fargo & Company (NYSE:WFC) is a diversified financial services company. Given the potential for lower interest rates following periods of high inflation, their profit margins on loans and other financial products may be compressed.
Wells Fargo stock slid 2.1% in April after guiding that its key net interest income metric could fall 7-9% this year due to higher deposit costs and lower loan demand, raising concerns about the bank’s outlook.
Since we are near the peak of the interest rate cycle (which has recently benefited stocks in the financial sector more than it has hurt them), we continue to buy stocks like WFC and are also buying near their peaks.
One could instead take profit from their positions of XOM and WFC and rotate into companies due to lower inflation and lower interest rates, such as growth stocks or ETFs, which could benefit from this backdrop.
Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) is a prominent real estate investment trust known for owning, developing and managing retail real estate, particularly malls and shopping centers.
With lower inflation, there may be less upward pressure on retail prices, potentially leading to diminished revenue growth for tenants in SPG’s malls and shopping centers.
Since we’ve seen inflation rise at a breakneck pace, and consumers have already been stretched close to their maximum price elasticity, with the cost of living likely to be a key theme in the U.S. election, it makes more sense to believe that the subsequent retail price increases will be far more moderate moving forward.
Other factors involved in SPG’s bear case are its moderating dividend growth rate after the COVID lockdown and its high payout ratio, which suggests that it may not be able to continue paying out its 5.42% dividend yield.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.