‘Pockets of Opportunity’: 3 Industries Stock Market Experts Are Watching in 2023

Despite the stock market’s grim performance of late, experts say some industries could be poised for a good 2023.

Swings in the stock market as a whole often make headlines. The S&P 500 Index plummeted about 20% in 2022, for example. But that data doesn’t tell the full story.

Different groups of related stocks within the market — what experts call sectors — can perform very differently from one another. Consumer staple stocks, which are stocks of companies that provide basic necessities like food and clothing, were only down about 3% for the year in 2022, according to data from S&P Dow Jones Indices. Communication services, like cable companies, were down a whopping 40%. Energy stocks, on the other hand, gained about 60% over the same period.

As the economic picture continues to change in 2023, Kristy Akullian, senior iShares strategist at BlackRock, tells Money that in all likelihood, “there will be pockets of opportunity after last year’s sharp repricing.”

Here’s what you need to know about the sectors experts say could perform well in the coming year.

Healthcare

If interest rates remain high and the U.S. economy moves into a recession this year as a result (as many experts are predicting), Akullian points to the healthcare sector as a contender for strong performance in 2023.

Investing experts consider healthcare stocks to be “defensive”, meaning they’re among the companies that perform well no matter how the economy is doing.

“People generally go to the doctor and take their medications regardless of what's going on in the economy,” Fidelity Investments portfolio manager Eddie Yoon explained in a recent blog post.

Akullian says the healthcare sector could be in even better shape this time around compared with previous recessions, citing the fact that more Americans have government-sponsored healthcare plans. That “should make healthcare spending less sensitive to the health of the economy,” she explains.

Energy

Energy stocks were the true outlier of 2022. Not only did they gain nearly 60% over the course of the year thanks to a huge run-up in oil prices, they were also the only S&P 500 sector to end the year in the green.

While experts say energy stocks are unlikely to repeat that exceptional performance in 2023, it’s certainly possible that they will outperform the broader market, albeit by a smaller margin.

“There may be near-term headwinds for the sector if global growth slows more than forecasted,” Akullian tells Money. But she adds that underinvestment in the sector and ongoing supply chain pressures still make energy stocks a good bet in 2023.

Industrials

If interest rates stay high in 2023, Callie Cox, U.S. investment analyst at the brokerage firm eToro, says cyclical stocks like those in the industrial sector could perform well. (Her outlook, unlike Akullian’s, assumes that the U.S. will avoid a recession).

Stocks like Honeywell International, United Parcel Service (UPS) and General Electric are part of the industrials sector. In a recent blog post, Fidelity portfolio manager Janet Glazer wrote that in the coming years, these types of companies stand to benefit from a new focus on sustainability, digitization and domestic onshoring. She noted that while a recession could slow progress related to those trends in the short term, it would be “unlikely to derail them.”

“In a high rate environment where inflation is slowing, it makes a lot of sense to focus on financially durable companies,” Cox tells Money. She puts stocks in the financial sector in that category, too.

Why investment portfolios should be diversified

In general, experts don’t recommend making major changes to your investment strategy in response to yearly fluctuations in the stock market. A big part of that advice has to do with the fact that investors are generally unsuccessful at predicting market performance. No one really knows exactly what will happen in a given year because there are so many unpredictable factors at play.

Instead, financial advisors tend to say the best way to make sure you can take advantage of growth within certain sectors of the market, even during an economic downturn, is to build a diversified portfolio. That way, you’re well-positioned no matter which sector does well and no matter which sector performs poorly.

For instance, Cox notes that if we do enter a recession this year and the central bank actually lowers interest rates, investors could benefit from holding stocks in growth sectors that have previously struggled, like real estate and tech. She suggests preparing for both scenarios — recession or no recession.

“The most important rule is don't allocate too much to one sector because then you're tied to the fortune of one industry,” she warns.

For those investors that are in the process of rebalancing or wanting to tweak their strategies, Cox says the current market could present some opportunities for higher returns, but “it all depends on your timeframe” and your investing goals.

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