Last year was tough for most investors. Nearly every sector suffered losses except for energy, while defense contractors and pharmaceutical companies were other examples of outliers.
Fortunately, the first few weeks of 2023 have been better, thanks partly to some encouraging data showing that inflation plus wage growth are beginning to decelerate. Yet, as the earnings season continues to play out and corporate layoffs pile up, questions are mounting about the strength of the U. S. economy.
In addition , with policymakers devoted to keeping interest rates “higher for longer, ” stocks could come under more pressure in the short term. Yet, at some point, the focus will shift to the future.
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Indeed, while much of the above paints a bleak picture, the outlook is more favorable for select sectors. That includes medical technology and alternative energy, which are usually being propelled by a few beneficial tailwinds.
By contrast, 1 sector that will traditionally holds up during challenging economic times — consumer staples — may struggle over the next few years. Let’s take a closer look.
Pent-up demand with regard to medical technologies
During the pandemic, large swaths associated with technology took off.
Medical technology was not one of them, with hospitals putting many elective procedures plus surgeries related to non-life-threatening conditions on hold. That has created a lot of pent-up demand today.
Additionally , many firms in this space could soon benefit from new products that help treat ailments, including diabetes, sleep apnea and arrhythmia, that plague millions of people. It can also worth noting that higher interest rates are less impactful for healthcare technology. Unlike other industries that borrow large sums to chase growth, medical technology generally isn’t heavily leveraged.
Names worth considering include Insulet ( PODD ), whose primary offering is a wearable pod that allows diabetes patients to forgo daily insulin injections. It recently cited strong need for its newest version of that product.
Dexcom ( DXCM ) is another company addressing the particular needs of diabetes individuals through the glucose-monitoring device. Its latest model, which is set to launch in February, will be 60% smaller and warms up 75% faster compared to previous variations.
In the meantime, a subsidiary associated with Inspire Medical Systems ( INSP ), Inspire Sleep, has what could be a game-changing sleep apnea treatment. Is actually a small device that will doctors place within the particular patient, the contrast in order to how healthcare professionals dealt with the issue until very recently: along with a clunky, awkward and obtrusive CPAP apparatus.
Government support for option energy grows
Whether the Inflation Reduction Act will do anything to bring down costs is a matter worth debating. But less arguable is usually that it is the most recent example of the massive amount of policy assistance that exists from governments around the world regarding green tech firms focused on producing alternative power sources.
The U. H. Department from the Treasury is still hammering away the details about who gets exactly what. We’ll likely learn more sometime during the first quarter. But make no mistake, several companies that have been surprisingly resilient during the particular most recent downturn will have a good influx associated with new capital at their disposal to improve their fortunes even a lot more.
Among those that could do well are Array ( ARRY ), an utility-scale solar panel producer. Also really worth keeping an eye on is SolarEdge ( SEDG ), which is focused more on the residential market within Europe.
Consumer staples not a best bet anymore
Last year, many investors flocked to defensive, income-paying customer staples. And for the most part, that will strategy paid off, with the Vanguard Consumer Staples ETF easily outpacing broad market indexes over the last 12 months, all while providing a dividend of about 2. 4%.
However, in recent months, valuations for many of these stocks have become far too rich. In fact , consumer staples are since expensive as they have ever been relative in order to the S& P 500 Index .
Therefore , anyone investing intended for growth (versus dividends) should reconsider their own defensive holdings. Indeed, the particular likes associated with Johnson & Johnson ( JNJ ) — which makes numerous consumer staple products despite technically being a health-care stock — Proctor & Gamble ( PG ) plus Kimberly-Clarke ( KMB ) have likely strike a value ceiling.
A Warren Buffett moment?
Expect indexes to give back some of this year’s early gains in the weeks ahead and perhaps test 2022 lows. In general, though, we won’t see a Warren Buffett-type buying moment upon the horizon. That’s because sentiment is definitely already bearish and positioning is light, which ought to limit the downside overall.
Still, a couple of sectors possess the potential for outsize returns once the particular challenges associated with increased interest rates and a challenging economic landscape begin to fade.
– By Andrew Graham, founder and managing partner associated with Jackson Square Capital