2022 is likely to end as the worst market of the last decade. Despite signs that next year will begin similarly, hope remains strong that the worst is over. That hope is sparking the search for the best sectors to invest in for 2023.
Smart investors should seek a blend of what has worked in 2022, value stocks, while also identifying strong sectors for some growth stocks. Value has significantly outperformed growth as 2022 winds down.
Persistently high inflation and a Fed determined to continue to raise interest rates in order to tamp it down suggest 2023 should begin as 2022 will end. Markets will continue to struggle as 2023 begins. So, value stocks will continue their strong performance relative to their growth stock counterparts.
That said, overarching secular trends will continue through 2023 and beyond. Stronger growth sectors will still see strong investment in the 2023 recession or not. So, stick to value and a select group of growth stocks in 2023.
| Best Sectors |
| Healthcare |
| Internet & Direct Marketing Retail |
| Consumer Staples |
Healthcare
The healthcare sector has been an exemplary performer in 2022, to the surprise of a few investors. Healthcare is something of a necessity, and for that reason, its performance tends to remain strong in any economy. 2022 has proven as much. While the S&P 500 has fallen more than 19% year-to-date, iShares U.S. Healthcare ETF (NYSEARCA:IYH) has performed much better, losing a bit more than 4% of its value in 2022.
For what it’s worth, even the major institutions are in disagreement(1)about the outlook for the healthcare sector in 2023. Credit Suisse (NYSE:CS) is bearish on healthcare moving into next year, expecting a decline in Covid-related revenue and a few blockbuster drugs coming off patent. Citigroup (NYSE:C) expects the defensive connotation of healthcare stocks to continue to serve the sector well in 2023 as it did in 2022.
Investors could do much worse than UnitedHealthcare (NYSE:UNH), which anticipates it will continue to approach growth in the range of 13% to 16% moving forward. The strong expectation of top-line performance, combined with a reliable dividend, makes it one of many smart choices in the healthcare sector in the new year.
Internet & Direct Marketing Retail
Unlike healthcare, the internet & direct marketing retail sector did not have a strong 2022. Representative funds, including the ProShares Online Retail ETF (NYSEARCA:ONLN) have shed a lot of value. ONLN stock has lost nearly 50%.
However, there are several reasons to believe 2023 should see an inflection point. For one, revenue growth in 2023 should outpace what the market has experienced in 2022. Yardeni Research calculates that internet & direct marketing retail sector revenues will have grown 8.2% in 2022 when all is said and done. Sector-wide revenue growth is anticipated to reach 10.4% in 2023, which should drive a capital influx in 2023.
Secondly, valuations across the sector have plummeted as tech has been pummeled by rising interest rates. But the interesting thing to note here is that ONLN stock’s price-to-book ratio is well below even pre-pandemic levels. There’s a strong argument to be made that a general overselling has occurred.
Expect investor capital to move into Amazon (NASDAQ:AMZN) and other eCommerce platforms like its Latin American counterpart MercadoLibre (NASDAQ:MELI).
Consumer Staples
The consumer staples sector has performed admirably in 2022. The Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) is essentially flat over 2022. In other years that would be a strong negative. In 2022, it is a strong result.
2023 will see consumer staples stocks’ continued strong performance. Wall Street is expecting a mild recession at some point during 2023. Consumer staples are nearly guaranteed to perform well for that simple reason. The market will start 2023 with a favorable view of the sector because of general fears of a recession. Consumers will continue to buy the basics, including food and personal products.
Further, December consumer confidence data should serve to alleviate some of the worst fears of investors. In December, consumer confidence levels reached highs not seen since April. That’s a strong indication that rising interest rates have the intended effect as inflation expectations for the coming year have fallen to a low.
In short, consumer staples have the dual benefit of a potential rise in consumer spending on strong sentiment and the defensive positioning of the sector.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
