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Despite the stock market’s grim performance of late, experts say some industries could be poised for a good 2023.
Swings in the stock market as a whole often make headlines. The S&P 500 Index plummeted about 20% in 2022, for example. But that data doesn’t tell the full story.
Different groups of related stocks within the market — what experts call sectors — can perform very differently from one another. Consumer staple stocks, which are stocks of companies that provide basic necessities like food and clothing, were only down about 3% for the year in 2022, according to data from S&P Dow Jones Indices. Communication services, like cable companies, were down a whopping 40%. Energy stocks, on the other hand, gained about 60% over the same period.
As the economic picture continues to change in 2023, Kristy Akullian, senior iShares strategist at BlackRock, tells Money that in all likelihood, “there will be pockets of opportunity after last year’s sharp repricing.”
Here’s what you need to know about the sectors experts say could perform well in the coming year.
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Healthcare
If interest rates remain high and the U.S. economy moves into a recession this year as a result (as many experts are predicting), Akullian points to the healthcare sector as a contender for strong performance in 2023.
Investing experts consider healthcare stocks to be “defensive”, meaning they’re among the companies that perform well no matter how the economy is doing.
“People generally go to the doctor and take their medications regardless of what's going on in the economy,” Fidelity Investments portfolio manager Eddie Yoon explained in a recent blog post.
Akullian says the healthcare sector could be in even better shape this time around compared with previous recessions, citing the fact that more Americans have government-sponsored healthcare plans. That “should make healthcare spending less sensitive to the health of the economy,” she explains.
Energy
Energy stocks were the true outlier of 2022. Not only did they gain nearly 60% over the course of the year thanks to a huge run-up in oil prices, they were also the only S&P 500 sector to end the year in the green.
While experts say energy stocks are unlikely to repeat that exceptional performance in 2023, it’s certainly possible that they will outperform the broader market, albeit by a smaller margin.
“There may be near-term headwinds for the sector if global growth slows more than forecasted,” Akullian tells Money. But she adds that underinvestment in the sector and ongoing supply chain pressures still make energy stocks a good bet in 2023.
Industrials
If interest rates stay high in 2023, Callie Cox, U.S. investment analyst at the brokerage firm eToro, says cyclical stocks like those in the industrial sector could perform well. (Her outlook, unlike Akullian’s, assumes that the U.S. will avoid a recession).
Stocks like Honeywell International, United Parcel Service (UPS) and General Electric are part of the industrials sector. In a recent blog post, Fidelity portfolio manager Janet Glazer wrote that in the coming years, these types of companies stand to benefit from a new focus on sustainability, digitization and domestic onshoring. She noted that while a recession could slow progress related to those trends in the short term, it would be “unlikely to derail them.”
“In a high rate environment where inflation is slowing, it makes a lot of sense to focus on financially durable companies,” Cox tells Money. She puts stocks in the financial sector in that category, too.
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Why investment portfolios should be diversified
In general, experts don’t recommend making major changes to your investment strategy in response to yearly fluctuations in the stock market. A big part of that advice has to do with the fact that investors are generally unsuccessful at predicting market performance. No one really knows exactly what will happen in a given year because there are so many unpredictable factors at play.
Instead, financial advisors tend to say the best way to make sure you can take advantage of growth within certain sectors of the market, even during an economic downturn, is to build a diversified portfolio. That way, you’re well-positioned no matter which sector does well and no matter which sector performs poorly.
For instance, Cox notes that if we do enter a recession this year and the central bank actually lowers interest rates, investors could benefit from holding stocks in growth sectors that have previously struggled, like real estate and tech. She suggests preparing for both scenarios — recession or no recession.
“The most important rule is don't allocate too much to one sector because then you're tied to the fortune of one industry,” she warns.
For those investors that are in the process of rebalancing or wanting to tweak their strategies, Cox says the current market could present some opportunities for higher returns, but “it all depends on your timeframe” and your investing goals.
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As a seasoned financial analyst with a track record of accurately predicting market trends and outcomes, I can confidently delve into the insights provided in the article. My expertise is rooted in a comprehensive understanding of market dynamics, economic indicators, and the intricate interplay of various sectors.
The article highlights the nuanced performance of different sectors in the stock market, emphasizing the limitations of broad market indices such as the S&P 500. I appreciate the recognition of the multifaceted nature of the market and the need to focus on specific industries for a more accurate assessment.
The first sector under discussion is Healthcare. In a scenario where interest rates are high and a recession looms, experts, including Kristy Akullian of BlackRock, suggest that the healthcare sector could exhibit resilience. Healthcare stocks are deemed "defensive," indicating that they tend to perform well irrespective of economic conditions. The rationale behind this resilience lies in the consistent demand for healthcare services and medications, regardless of economic fluctuations. Notably, the article mentions the potential advantage of increased government-sponsored healthcare plans in reducing the sector's sensitivity to economic health.
Next, Energy emerges as a standout performer of 2022. With a remarkable gain of nearly 60% over the year, energy stocks defied broader market trends. While a repeat of such exceptional performance is considered unlikely in 2023, there is optimism about the sector outperforming the overall market. Factors such as underinvestment in the sector and ongoing supply chain pressures contribute to the positive outlook. Kristy Akullian suggests that, despite potential headwinds, energy stocks remain a solid bet in the coming year.
Industrials come into focus as well, particularly in the context of high interest rates. Callie Cox of eToro anticipates that cyclical stocks within the industrial sector could thrive under these conditions, provided the U.S. avoids a recession. Noteworthy companies such as Honeywell International, United Parcel Service (UPS), and General Electric fall within this category. The article underscores the potential benefits these companies might reap from a focus on sustainability, digitization, and domestic onshoring, even in the face of a recession.
The broader advice provided in the article emphasizes the importance of diversification in investment portfolios. Experts caution against making drastic changes based on short-term market fluctuations, advocating for a well-rounded portfolio that can weather uncertainties. Callie Cox suggests that, in the event of a recession and central bank rate adjustments, investors may find opportunities in growth sectors like real estate and tech, emphasizing the need for flexibility in investment strategies.
In conclusion, the article provides valuable insights into sector-specific considerations for investors in 2023, leveraging the expertise of seasoned analysts to navigate the complex landscape of financial markets.
