Tips for investing in 2023 as a potential recession looms large

Welcome to the weekend, readers. I'm senior reporter Phil Rosen.

Today's newsletter features my conversation with eToro's investment analyst, Callie Cox. She shared her thoughts on how investors can position themselves in the new year as the Federal Reserve continues to battle inflation.

After that, I've rounded up the top markets stories of the week, just for you.

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Callie Cox is a US investment analyst at eToro. This conversation has been lightly edited for length and clarity.

Phil Rosen: What are the biggest risks to the US economy this year?

Callie Cox: The biggest risks include whether the Fed can get inflation down, and whether we enter a recession. The job market and corporate earnings are the two catalysts that make me think we can avoid those risks.

How do you anticipate the Fed to navigate those two catalysts you mention?

CC: The Fed will be more responsive to what's happening in the job market, because the job market directly impacts inflation. If you're the average American, your primary source of income is your job. Hiring has been surprisingly resilient and wage growth is cooling off, so the Fed is striking the right balance of toning down the economy without causing a recession.

However, I think Thursday's CPI report shows how tough it's going to be to get inflation back down to 2%. Services inflation — think rent, haircuts, insurance prices — is still growing at a 7% clip annually, which is way too high in the Fed's mind.

And the kicker here is that services inflation is the type of inflation that the Fed can best control through the job market. It's more demand-driven. So hot services inflation could give the Fed enough reason to keep rates high, and the longer rates stay high, the more likely we actually get that recession.

That said, how should investors position themselves for 2023?

CC: Bonds typically have historically provided a good cushion during recessions. Inflation is slowing, growth could still be slowing, and that's the perfect environment for bonds to thrive.

And I also think of defensive stocks — consumer staples, utilities, energy, and more established healthcare companies like Big Pharma names.

I call these the markets' comfort food, where even if a recession happens, you still need to eat food, you still need power, you can still get sick and take medicine. These are more economically-resistant sectors.

If we do hit a recession, it's a great time to slowly build up your risk appetite in anticipation of us getting through it.

Get the full insights from our conversation.

What do you think of Cox's investment strategy? Tweet me @philrosenn, or email me prosen@insider.com.

And here's are the top stories from markets this week:

1. This batch of stocks have at least 34% upside right now as the rest of the market struggles for gains. Goldman Sachs strategists put together a list of high-potential companies that could thrive in what's expected to be a highly volatile year — see the 40 stocks.

2. Bed Bath & Beyond is in the midst of a massive short-squeeze. Bearish traders are playing a classic game of chicken as the company weighs a potential bankruptcy. This week, the stock saw a more than 230% jump.

3. I asked the buzzy AI bot ChatGPT to write a stock market story for me and it finished in under a minute. OpenAI's smart language tool spat out 400 words devoid of typos and with a surprisingly coherent breakdown of market trends. Read the robot's article here.

4. Sam Bankman-Fried said the November tweets from Binance CEO Changpeng Zhao were a direct assault on Alameda Research. In a Substack post, the disgraced FTX founder described an "extreme, quick, targeted crash precipitated by the CEO of Binance" that made Alameda insolvent. Here are the full details.

5. Wharton professor Jeremy Siegel said the Federal Reserve needs to end its aggressive policy right now. Central bankers are likely overestimating inflation and need to halt its rate hikes, Siegel said Thursday. In his view, the CPI report had an "upward bias" due to lagging indicators.

6. FTX bankruptcy documents show the list of investors that are set to be completely wiped out. There are some familiar celebrity names among them — including NFL legend Tom Brady.

7. Wells Fargo is retreating from its mortgage business. Rising borrowing costs have slammed housing demand, and the bank has decided that it will now only offer home loans to existing customers and families from minority communities. The CEO phrased it as a "narrowing" of focus.

8. These stocks are set to beat the market as an economic downturn hits the US economy, according to Bank of America. See the strategists' favorite 15 names with high free cash flow.

9. Morgan Stanley analysts explained why home prices are set to drop in 2023 for the first time in over a decade. In a research note, they explained that demand has plummeted as mortgage rates soar, and trends are about to shift this year. These 3 data points illustrate striking similarities between now and the mid-2000s crisis.

10. A closely watched indicator of a coming recession is blaring its loudest warning in four decades. The Treasury yield curve on the 2- and 10-year notes hit its deepest inversion in over 40 years this week. It's a notorious predictor of a downturn — and preceded the recessions of 1990, 2001, and 2008.

Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com

Edited by Max Adams (@maxradams) in New York.