With fears growing that rampant federal interest rates could lead to an economic recession next year, investors are eyeing everything from US healthcare to UK stocks and gold as a potential refuge in recessions this week.
And even though last November’s strong jobs report belied the story of an imminent slowdown in the US economy, the bleak outlook for next year from most Wall Street banks continues. JPMorgan, Citi and BlackRock are among those who believe a 2023 recession is likely.
Increase customization
Here, the strategists emphasize that deflation is uncertain, but they see the Federal Reserve’s massive monetary tightening, the sharp slowdown in the housing market, as well as the inversion of the Treasury yield curve, as substantial reasons to expect this growth stop.
Recessions are usually bad news for stocks, and some investors believe the market’s sharp decline for 2022 indicates it’s already entering some period of slowdown. The S&P is down 25.2% from its all-time high in a year, including 14.6% year-to-date; This compares with an average 28% drop in recessions since World War II. According to data from CFRA Research. However, many Wall Street investors are increasing their allocations to areas of the market known to outperform during turbulent economic times.
Expert opinion
“When investors sense a recession, they look for companies that generate income regardless of the economic cycle,” said Jack Ablin, chief investment officer at Crescent Capital, which forecasts a mild recession in 2023.
In their outlook for 2023, strategists at the BlackRock Investment Institute recommended holding stocks in the healthcare sector, an area where demand is believed to be less sensitive to economic fluctuations. In fact, the S&P Healthcare index is down just 1.7% year-to-date, far outperforming the broader index. They said the company also favors energy and financials stocks, although they are underweight developed markets as a whole.
BlackRock pundits have warned of an impending recession and that central banks are on course for excessive tightening as they try to tame inflation. Even in their view, stock valuations still don’t reflect the impending damage.
Gold and the dollar
As for JPMorgan analysts, they expected a mild recession and that the S&P would test its 2022 lows in the first quarter of next year. The bank said in its statement that above-average valuations and Fed tightening make US equities unattractive relative to other developed markets. The bank has described the UK as the best choice for its investments at the current stage.
Bank of America expected US stocks to enter flat next year, but also expected gold prices to climb as much as 20%, supported by the declining dollar. It should be noted here that commodities such as gold are priced in US dollars, and therefore the precious metal becomes more attractive to foreign buyers as the value of the currency falls.
Growth in a bear market
Meanwhile, Citibank said recession fears and weak earnings growth would hurt US stocks in 2023 and advised its clients to treat Wall Street’s rally as “growth in a bear market.” Conversely, Chinese equities are overweight, according to Citibank, which is expected to recover after the easing of coronavirus restrictions and government support for the real estate sector.
Fourth-quarter earnings for the S&P are expected to fall 0.4% from the same period last year, before rebounding over the course of 2023 to hit a 9.9% growth rate in the recent quarter, according to data from Refinitiv .
Meanwhile, investors are expecting important economic data this week on the US services sector, which grew at its slowest pace in nearly two-and-a-half years last October. And at a time when not everyone takes a recession for granted, signs of easing inflation have fueled hopes that the Federal Reserve may tighten monetary policy less than expected, supporting a S&P recovery that has pushed growth from lows of October.
Lucas Kawa, an asset strategist at UBS, noted that stock prices already factor in recession risks. Some of the factors that have hurt markets recently, including weaker growth in China and Europe, should turn into supportive factors in 2023, supporting asset prices.
In turn, Garrett Melson, portfolio strategist at Natixis Investment Managers, sees a soft landing where the US economy is growing at a moderate pace, with higher interest rates continuing to relax consumers but not completely crushing spending.
The most important economic events for this week:
- Monday
9.45 PMI in the services sector
10:00 ISM data in the services sector
10:00 Factory orders - Tuesday
8.45 Data on the trade deficit - Wednesday
8:30 Review the annual variable rate of productivity
8.30: Review of the annual variable rate of employment - Thursday
8:30am: Applications for initial and continuing unemployment benefits - Friday
8:30 PPI
10:00 Consumer optimism and confidence index
10:00 5-year inflation forecast
10:00 Review of wholesale stock
Note: Eastern Standard Time
