After the first back-to-back monthly gains since 2021, Wall Street again started wavering in December, probably due to the relentless market forecasts about a looming recession and an uncertain Fed rate outlook.
Goldman Sachs, Bank of America and JPMorgan
predict a U.S. recession in 2023. "Inflation is eroding everything I just said and that a trillion and a half dollars will run out sometime midyear next year," I.P. Morgan CEO Dimon said, as quoted on investing.com.
Looking at the projections, the recession model calculated by the New York Fed estimates a 38% probability of a recession in the United States in November 2023 (readings above 30% are historically harbingers of an economic downturn), while for the Fed's latest dot plots the terminal rate for 2023 is given as 4.6%, the investing.com article mentioned.
The latest bouts of economic data — hotter-than-expected ISM services and stronger jobs — made the matter worse as it cemented the fact that the U.S. economy is still on a decent footing. And this, in turn, reignited the speculation that the Fed may go for steeper rate hikes in the coming days to tame inflation. However, the ISM Manufacturing PMI declined to 49 in November of 2022 pointing to the first contraction in factory activity since May 2020.
Against this backdrop, Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks it’s time to take profits “before the Bear returns in earnest,”
as quoted on TipRanks. With the “risk-reward of playing for more upside quite poor at this point,” Wilson recommended investors “stay defensively oriented (Healthcare, Utilities, Staples).”
Though we are currently in December, one of the successful months for stock investors, we may not see a Santa rally this year. The VIX also said that this December won't witness a Santa Claus Rally,
as quoted on seeking alpha.
Hence, we highlight below three sector ETFs to counter the current market turmoil.
Sector ETFs in Focus Healthcare – Health Care Select Sector SPDR ETF ( XLV Quick Quote XLV - Free Report) – Zacks Rank #2 (Buy)
The healthcare sector has been gaining strength lately, driven by increased volatility and uncertainty triggered by inflation, tighter monetary policy, the war in East Europe and supply chain disruptions. Added to the strength is its non-cyclical nature, which provides a defensive tilt to the portfolio amid market turmoil. It is one of the few sectors that has been adding jobs constantly, indicating increasing activities in the sector (read:
4 Sector ETFs to Play Upbeat November Jobs Data). Consumer Staples – Invesco Dynamic Food & Beverage ETF ( PBJ Quick Quote PBJ - Free Report) – Zacks Rank #1 (Strong Buy)
This product offers targeted exposure to U.S. stocks selling food and beverage (F&B) products. The increasing global population is the main driver of the U.S. food industry. This is again a non-cyclical industry and remains less ruffled by economic headwinds.
The industry is also managing inflation with the procedure of “shrinkflation.” The term describes the maintenance of companies’ margins by shrinking consumer products in weight, size or quantity while their prices remain the same or are increased. As companies are striving with high raw materials costs and supply-chain issues, many are cutting their product sizes and weights in response to maintain the profit margins (read:
'Shrinkflation' to Save Consumer Staples ETFs). Utilities – Utilities Select Sector SPDR ETF ( XLU Quick Quote XLU - Free Report) – Zacks Rank #2
The utilities sector is a great investment for those seeking yields and safety but should be avoided by those expecting market-beating returns. It is among the most stable sectors over the long haul and its players are likely to be decent investments. Though the sector underperforms in a rising rate environment, the sheer non-cyclical nature of the sector has kept the ETF on the radar.