Sunday, February 5, 2023
HomeMarketStocks Are Clawing Their Way Back. Consider These Moves for 2023.

Stocks Are Clawing Their Way Back. Consider These Moves for 2023.

Chris Senyek, chief investment strategist at Wolfe Research, recommends defensive sectors such as healthcare.

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Karen Ducey/Getty Images

As the Thanksgiving tryptophan coma wears off, it’s time to come up with a game plan to navigate the last month of 2022 and what is likely to be a challenging market next year, despite a solid holiday-shortened trading week.

The
S&P 500 index
closed up 1.5%, while the
Dow Jones Industrial Average
was up 1.8% and the
Nasdaq Composite
finished up 0.7%. Enjoy it while it lasts.

If this year was marked by worries over inflation and fears of a coming recession, 2023 is expected to be the culmination of those worries, with many on Wall Street expecting a downturn to take hold in the first half of the year. For investors, that looming recession may prompt the feeling that there is nowhere to hide—but in every market, there are pockets to protect capital and perhaps even to profit.

The first thing investors will want to do is tend to their housekeeping, which is to consider making tax-loss-harvesting trades to book 2022 losses so that they can be used to offset future gains. With major indexes creeping into bear market territory this year, it’s likely that investors are already sitting on an arsenal of booked losses.

Step two: Take advantage of the recent tactical rally in the equity and fixed-income markets, suggests Sameer Samana, senior global market strategist at Wells Fargo. Nearly a quarter of the S&P 500 was wiped out at the index’s low this year, but since October, it has come marching back and is now down a mere 15.5%. Meanwhile, the yield on the 10-year Treasury note stands around 3.75% after topping 4.2%. (Bond yields move in the opposite direction of prices.)

“This argues for taking chips off the table and building some dry powder,” Samana tells Barron’s.

What to do with all the cash? Letting some of it sit isn’t as bad of an idea as it was just a few years ago. Savers are finally starting to earn some interest—one of the few benefits of the Federal Reserve’s rapid interest-rate increases this year. While those hikes sparked downturns in 2022, their full effect may not be felt until next year, which means there will probably be more volatility ahead.

“Monetary policy comes with a long and variable lag,” Samana explains. “It all comes to roost next year.” While he expects to see a recession in 2023, he was careful to note that it would be much more moderate than the 2008-09 financial crisis. “We don’t see evidence that households are overextended like they were in the lead-up to 2008,” he says.

Cash isn’t the only attractive option for next year. The expected downturn means that a lot of assets will be good buying opportunities for longer-term investors—assuming they have the gumption to buy even when the market still looks volatile.

Chris Senyek, chief investment strategist at Wolfe Research, recommends focusing on defensive sectors such as healthcare and consumer staples. In addition to downside protection, investors get dividends. The
Health Care Select Sector SPDR
exchange-traded fund (ticker: XLV) is down 3% this year and yields 1.5%, while the
Consumer Staples Select Sector SPDR
ETF (XLP) is off by 1% and yields 2.5%.

“Focus on these until there is more sign of a turn,” Senyek tells Barron’s, noting that he doesn’t think the market has bottomed yet.

Senyek is neutral on energy in the short term, as he’s skeptical there will be an increase in demand, given the slowing global economy and questions over China’s reopening. Banks have been unfairly punished, he says, though he remains cautious in a downturn as investors fret about credit quality.

“If they get through the cycle, banks are one of the first groups you will want to hold coming out,” Senyek says.

At least there’s something to look forward to.

Write to Carleton English at carleton.english@dowjones.com

Credit: marketwatch.com

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