The Terriers slipped to a seventh defeat in 10 league outings this term as Watford triumphed 3-0.
With Newcastle United claiming a point from a goalless draw at Southampton, Town were dumped back at the bottom of the table.
“We don’t have a problem with morale and confidence,” said Wagner, whose side are still chasing a first win of the season.
“The players showed that in the first 10 minutes, when we started on the front foot. This has been the case in recent weeks. Against Watford, we had a problem with individual performances. This means, as a team, we did not perform at our highest level in defence.
“We did not want this but these are humans and it can happen. The players know it and now it is all about the reaction we show in our next game.
“Defensively, we have to be a lot better. Offensively, we keep on doing what we are doing but with an end product.”
Town are next in action a week tonight at home to Fulham in a game between two of the top flight’s bottom three clubs.
A much better defensive display will be needed than was the case at Vicarage Road, as goals from Roberto Pereyra, Gerard Deulofeu and Isaac Success clinched a comfortable win for the hosts.
The first two strikes were impressive solo efforts but eminently preventable from a Town perspective with Pereyra allowed to glide through five would-be challengers.
“We had to stop both players,” added Wagner. “If possible, fairly outside the box. But if you are not active and aggressive then you will not stop them.
“These are quality wingers, yes. But this is what we have to be ready to face. This situation we should have been able to solve. We gave them too much space.”
Match report: Page 3