Wall Street hunts for recession plays to weather potential 2023 turbulence
Investors are eyeing everything from the U.S. healthcare sector to UK stocks and gold as potential havens during a recession, as worries grow that the Federal Reserve’s interest rate increases will bring on an economic downturn next year.
as reasons to expect that growth will stall.Recessions are usually bad news for stocks, though some investors believe 2022’s sharp decline in equities suggests a degree of slowdown has already been factored in. The S&P 500 has fallen as much as 25.2% from its all-time high this year, compared to an average decline of 28% the index has recorded in recessions since World War Two, according to data from CFRA Research. The index is down 14.6% year-to-date.
Nevertheless, many on Wall Street are increasing allocations to areas of the market that have a reputation for outperforming during uncertain economic times.”When investors see a recession coming, they want companies that can generate income regardless of the business cycle,” said Jack Ablin, chief investment officer at Cresset Capital, who expects a mild recession in 2023, followed by Fed easing.
Snap Inc plummeted 40.6%, dragging down several social media and internet stocks, after the Snapchat owner slashed its second-quarter earnings forecast and said the economy had worsened faster than expected in the last month.
The stock was set for its worst single-day drop.
Twitter Inc, Google-owner Alphabet Inc, Meta Platforms Inc and Pinterest Inc, which rely heavily on advertising revenue, fell between 4.1% and 24.3%.
“We are seeing weakness possibly in consumer and now in advertising spending,” said Dennis Dick, a trader at Bright Trading LLC in Las Vegas.
“What we need to see is that the Fed’s plan is working. Until we see a decent data point, it’s going to be sell first, ask questions later.”
Data showed U.S. business activity slowed moderately in May, while sales of new U.S. single-family homes tumbled to a two-year low in April likely as higher mortgage rates and soaring prices squeezed first-time buyers.
“Everybody has been talking about a recession and the economic data is following that path,” Paul Nolte, portfolio manager at Kingsview Investment Management, said.
“We may wind up with slower economic growth and still above-desired inflation. That’s a perfect storm against equities as it will slow earnings growth and potentially compress margins even further.”
Disappointing forecasts from Walmart Inc and other retailers have rattled market sentiment recently, adding to evidence that rising prices have started to hurt the purchasing power of U.S. consumers.
On Friday, the S&P 500 and the Nasdaq marked their longest streak of weekly declines since the dotcom bust in 2001 on mounting concerns that aggressive policy tightening by the Federal Reserve might tip the economy into a recession.
U.S. Federal Reserve Chair Jerome Powell is scheduled to speak later on Tuesday, with investors looking for fresh comments about the path of future interest rate hikes.
Markets are pricing in 50 basis point rate hikes by the Fed in June and July.
Nine of the 11 major S&P sectors declined after rising broadly in the previous session. The communication services sector slid 4.8%.
At 12:04 p.m. ET, the Dow Jones Industrial Average was down 272.27 points, or 0.85%, at 31,607.97, the S&P 500 was down 67.58 points, or 1.70%, at 3,906.17, and the Nasdaq Composite was down 324.80 points, or 2.82%, at 11,210.48.
Abercrombie & Fitch Co tumbled 29.6% after the apparel retailer trimmed its annual sales and margins outlook, citing a surge in freight and raw material costs.