Concerns are growing that the Federal Reserve’s increase in interest rates will trigger an economic slump next year, and investors are looking at everything from the US healthcare industry to UK stocks and gold as prospective havens during a recession.
Wall Street banks have issued several pessimistic predictions for the coming year, but a solid November jobs data released on Friday disproved those predictions.
Several financial institutions, including JPMorgan, Citi, and BlackRock, predict a recession in 2023. Although a downturn is not guaranteed, strategists believe that growth will stagnate due to the Fed’s significant monetary tightening, the housing market’s sharp slowdown, and the inverted Treasury yield curve.
Recessions are often terrible news for stocks, but some investors think that the steep decrease in equity prices in 2022 indicates that some degree of slowness has already been taken into account.
As shown in statistics from CFRA Research, the S&P 500 has dropped as much as 25.2% from its record high this year, versus the typical dip of 28%, the index has experienced in recessions since World War Two. The index has fallen 14.6% so far this year.
However, many on Wall Street are boosting their allocations to market segments that have a track record of outperforming during periods of economic uncertainty.
Jack Ablin, the chief investment officer at Cresset Capital, said when investors anticipate a recession, they seek businesses that can create income independent of the state of the economy. Ablin predicts a slight recession in 2023, followed by Fed easing.
BlackRock Investment Institute experts suggested equities in the healthcare sector in their 2023 outlook, as this industry’s demand is likely to be less sensitive to macroeconomic changes. The S&P 500 Health Care sector has dropped about 1.7% so far this year, far outperforming the performance of the entire index.
BlackRock claimed that despite being underweight developed markets overall, the company also favours energy and finance stocks.
The firm’s experts believed a recession is predicted and central banks are on track to tighten policy to control inflation. Though generally, it is known equity valuations do not yet fully account for the coming harm.
JPMorgan’s analysts foresee a “mild recession” and a test of the S&P 500’s 2022 average levels in the first quarter of 2019. U.S. stocks are unappealing in comparison to other mature economies, the bank claimed, naming the UK as its top selection, due to above-average valuation and Fed hawkishness.
BoFA Global Research predicts that U.S. stocks will conclude 2023 with a largely flat performance, but gold prices will increase by up to 20% due to the weaker dollar.
When the value of the dollar falls, raw resources like gold, which are priced in dollars, become more appealing to foreign buyers.
Meanwhile, Citi warned that concerns about a recession and reduced earnings growth could damage US markets in 2023 and suggested that clients view bull market rallies in US stocks as bearish market rallies. They are underweight China in contrast, anticipating a rise for Chinese stocks from the relaxation of COVID-19 limitations and government assistance for the real estate market.
According to Refinitiv statistics, the S&P 500’s fourth-quarter earnings are predicted to decrease by 0.4% from the same time last year before improving throughout the year and reaching a 9.9% growth rates in the fourth quarter of next year.
Investors are anticipating economic data on the US services sector, which expanded in October at the slowest rate in over two and a half years.
Recession is not universally accepted as a given. Hopes that the Fed may loosen monetary policy less than anticipated have been stoked by signs of declining inflation, which has helped the S&P 500 recover from its October low.