What to do when you aren’t sure whether the economy’s headed for a “soft landing” or a “no landing”?

Well, grab a barbell, of course! With some defensive exposure. You know, just in case.

That’s the (ad nauseam) message from Morgan Stanley’s Mike Wilson who, like everyone else, has seemingly run out of creative ways to say the same thing every week. (I sympathize, Mike. The saving grace for me is that I’m not confined to writing about US equities.)

Wilson’s fond of suggesting (not implausibly) that the US equity market’s a kind of Potemkin village, where record after record for mega-cap, high quality names (Apple hit a new record on Tuesday) obscures an otherwise vacuous underlying reality.

“In addition to small-cap [underperformance], other areas of the market outside of the largest, high quality leaders have also shown a breakdown in relative performance,” Wilson said, pointing to the familiar figure below.

What, Wilson wondered, is “the market worried about under the surface”?

He answered his own question: It’s the same onerous juxtaposition that’s causing consternation for small businesses (i.e., “mom and pop” operations which don’t have access to capital markets) and lower-income households.

“We think it’s a combination of weaker growth… with inflation that’s still too high for the Fed to cut pro-actively even though rates are too high for many companies and consumers,” he wrote, cautioning that at some point, this conjuncture may “become untenable for lower quality economic participants.”

You gotta love that: “Lower quality economic participants.” Next time you see a working-class American, pat them on the back, give them one of your extra 20s and say, “You’re a lower-quality economic participant, aren’t you? God bless. Thoughts and prayers.”

In the event too many “lower quality economic participants” fold up, growth could slow further, Wilson warned, “even as many larger companies are doing fine, and even thriving.” (“High quality economic participants.”)

The takeaway, from a portfolio perspective, is the following, from Mike: “In an uncertain macro world, investors should stay up the quality curve with a barbell of both growth and cyclicals to participate in both the soft and no landing outcomes [with] some defensive exposure as a hedge” against a more meaningful downturn.