Here’s how to invest in the stock market next year, according to Bank of America
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Phil Rosen
Dec 8, 2022, 18:14 IST
Spencer Platt/Getty Images
Happy Friday eve, team. I'm your host, Phil Rosen, reporting from New York.
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As it turns out, one benefit of the pandemic is that it made money-savers out of us. Investors have built up a $1.9 trillion cash pile since the onset of COVID-19.
Some commentators say it's just about time to unload their wallets into markets as the new year sets in on hopes of loosening Fed policy and thus a stock rally.
But that may not be the best playbook to follow for 2023, according to one Wall Street firm, as strategists say "timing is everything."
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1. It won't be time to buy into stocks until after the Fed makes its last rate hike. That's what Bank of America's Research Investment Committee said.
The firm is predicting that policymakers will make their last interest rate hike in the first quarter of 2023, and that will give investors a promising entry point into the stock market.
Remember, the Fed right now is looking to cool down a hot economy in an effort to tame inflation, which is at multi-decade highs. It does that by raising benchmark interest rates, which makes borrowing costs for everything from homes to credit cards more expensive.
Specifically, the Fed is looking to stifle a searing-hot labor market. This could happen either via companies dialing down the number of open positions they want to fill or by laying off workers, or both. This "cooling down" would likely push unemployment higher and be the signal for the Fed to take a break from raising rates.
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"Once rate hikes bite labor markets, the Fed will pause, and investors should deploy the $1.9 trillion," Bank of America strategists said. "History reveals superlative returns after the last Fed hike."
Traders expect the Fed to lift interest rates by 50 basis points next week, and then by 25 basis points at the February meeting, CME's FedWatch Tool shows.
In terms of how to approach the market, BofA said investors should focus on owning companies that have resilient earnings, especially given the increasing number of flashing recession signals.
"High free cash flow stocks outperformed the market by 7 percentage points per year since 1991, and during major economic downturns, companies with steady profits outperformed by 10 percentage points," the bank said.
Analysts will be monitoring equity flows to judge when exactly to buy into stocks — specifically, outflows from equity funds and ETFs, which have been oddly absent this year, according to the bank.
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With a new normal of elevated inflation, BofA expects equal-weighted stock market indices to perform better than market-cap-weighted ones. That means, effectively, smaller companies will outperform larger ones.
"We resist buying the dip in beaten down growth stocks. $100 of small cap value in 1926 is worth $36 million today vs $0.8 million for large cap growth," BofA said.
How will you adjust your stock market investing strategy for the new year as recession signals heat up?
2. US stock futures rise early Thursday, as investors expect the Federal Reserve to slow its interest rate hikes to 50 basis points from 75 next week. Meanwhile, November was the dollar's worst month in over a decade — but at least one strategist thinks the greenback's dominant run might not be over just yet. Here are the latest market moves.
3. Earnings on deck: Broadcom, Costco, and Cisco Inc, all reporting.
4. Here's a point-by-point look at how stocks would perform as a recession begins, according to Deutsche Bank. The bank's chief US equity strategist said the current rally will fade in the first quarter of 2023, but stocks can rebound later in the year. He explained what to buy into as the recovery follows the downturn.
7. Billionaire Ray Dalio said stocks aren't yet pricing in the Fed pushing rates near a "very harmful" level. The legendary investor estimated that policymakers may push the benchmark rate as high as 5.5%, which he warned could weigh especially heavily on the stock market.
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