Yesterday I outlined three sectors – real estate, utilities and energy – that would underperform if the market fell a little further this fall and investors looking to free up cash should consider selling. Today, let’s take a look at the flip side and identify three sectors you might consider buying in a falling market.
The thing is, if the weakness in equities happens over the next few months, it will be a different kind of decline, based on a different set of economic circumstances than everyone is used to. This will be in response to rate hikes, which are continuing, but we still have strength in the labor market, and consumer spending has moderated somewhat, but is generally holding up well. Crucially, we still have inflation at 1980s levels. These are unique circumstances, and any selling will be based on the fact that the Fed has effectively said it will continue to raise rates until it is clear that she went too far.
This is what their reported confidence in the three-month averages of the historical data actually means. By the time a real weakness appears in the numbers, the damage will have been done and will be difficult to repair. This is essentially what has happened over the past year, but in the opposite direction. Everyone who went shopping knew there was inflation, but the Fed’s insistence on waiting for the average of its favorite indicator, the CPE, to confirm that for several consecutive months meant that it was late to the party in terms of getting that inflation under control in .
And yet, as they prepare to reverse this policy, they still say they will take the same approach. They acted late last time and now tell us they will do it again. That said, I may have too much faith in Powell and the rest of the FOMC, but I think there’s a chance that no matter what they say right now, they won’t repeat the same mistake. Even though they know deep in their hearts that they will have to ease the rides early, they have no choice but to say that their decisions will be driven by the data.
This may suggest that they will be behind the curve again, but from an image point of view, it is better for a central bank to suggest this than to say, “Trust us!” We’ll get through this, but we’ll probably get through this!” Given their recent experience, however, this might be closer to what’s really going on.
We are likely to face market weakness over the next few months in anticipation of a recession that may not occur, as inflation continues to put upward pressure on prices and rate hikes cause a quicker end to the weakness. provided that. Like I said, a unique set of circumstances, but certain market sectors could outperform in this scenario.
The first, healthcare, is a traditionally defensive sector for investors. The assumption is that it’s the last thing people cut from their budgets, but as we saw in 2008/9, it’s no place to hide in a total recession with losses. massive jobs that result in a high number of personal bankruptcies. In this scenario, however, that is probably not what we will see, and healthcare spending is expected to remain at or near recent levels. It’s also not an industry unduly affected by rising rates, so it could escape a rate-rise-induced slowdown relatively intact.
The same logic goes for another traditional defensive game, consumer staples. Talk of a recession will prompt consumers to cut back or eliminate certain luxury items, but until there is one, that will be the limit of most people’s spending adjustments.
The third sector that I like in an environment of rising rates without too much economic damage is financials. Banks and insurance companies actually benefit from rising rates and if, as they say, this is a short-term thing that is stopped before any real damage is done, other areas of their business such as consumer banking and business lending will hold up well. Market dips that will accompany rate hikes could hurt from a wealth management revenue perspective, but any buying would be based on the assumption that markets would rebound, so would only be seen as a temporary issue.
Health care, consumer staples and financials are all sectors that will not be affected too much by rate hikes, where earnings should be little affected by the fear of a recession that these hikes will cause. Then, if the Fed were to do the right thing and learn from its mistakes, it would be ideally placed to bounce back along with everything else. This gives all three sectors some downside protection, but still with upside potential, and this is what investors should be looking for when buying on the downside this fall.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.