The US economy will go through a mild recession this year, but investors should position themselves for a sustained market rally, according to Invesco’s global market strategist, Brian Levitt.
He said the Federal Reserve will wrap up its monetary policy tightening sometime in the first quarter of 2023, with markets pricing in an appropriate terminal federal funds rate of about 5%. Then, stocks will stage a gradual rebound, coinciding with an economic recovery as a high-inflation environment ends.
“I believe the market has bottomed for this cycle,” Levitt told Insider.
By the end of the year, he predicts markets will finish the year positive, with the S&P 500 above 4,000, representing more than 3% upside from current levels.
To be sure, stocks will look different compared to during the pandemic, when speculative growth was “incredibly overvalued,” Levitt said. Over recent months, valuations for growth stocks like Tesla and Apple — as well as riskier assets like crypto — have pulled back dramatically, and that trend looks set to continue.
But as long as investors can stomach some near-term volatility, he said it could be time to start adding risk back into portfolios.
Here are five ways to be positioned for a rally.
First, start preparing now, or you may miss the boat. Stocks could still retrace some of their recent declines, Levitt maintained, but won’t necessarily return to October’s low.
“We are in the period where you may have some near-term downside risk, but the challenge for investors, if you’re trying to time a 5% to 10% move down, you run the risk of missing the recovery,” Levitt said. “We should try to be positioned for the next couple years for a sustained recovery.”
Second, the part of the market that tends to do best in this environment is higher-yield corporate bonds, which have the potential to generate equity-like returns, he said. They also have sensitivity to interest rates, so those assets could see a benefit if the economy rolls over and rates fall.
Third, Levitt recommends exposure to the cyclical parts of the market during a recovery, such as stocks in sectors like financials, materials, and industrials.
Fourth, he expects bitcoin to tick higher in 2023, since it tends to roughly mirror rallies in equities and remained relatively stable amid the recent turmoil in crypto.
Finally, Levitt said emerging markets will start to look enticing after getting slammed last year by the strong dollar, as the Fed backs off its monetary tightening and markets begin to price in easing.
“The rate differential between the US and the rest of the world starts to come down, which suggests a weaker dollar,” he said. “When the dollar cycle breaks that’s beneficial for growth around the world, and emerging market bond yields look more attractive. It suggests more of a risk on backdrop where capital starts to flow to less developed parts of the world.”
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