- The stock market is in the middle of a turbulent patch that’s seen proven strategies stop working, while unloved trades have stepped up to take their place.
- Credit Suisse offers four portfolio tweaks investors can make to ensure they keep generating strong returns through next year.
The stock market has been flipped upside down.
Value stocks, which have suffered at the hands of their growth counterparts for the majority of the 10-year bull market, are suddenly the hot ticket for portfolio managers. Meanwhile, stocks that look desirable and safe because of their low volatility are headed for their best quarter in seven years relative to the broader market.
What’s resulted is a landscape that looks increasingly foreign to equity investors who have become accustomed to certain circumstances — ones that rewarded growth stocks and the traders who indiscriminately piled into them.
While this has been a tough pill to swallow for some investors, there are still plentiful opportunities available to those willing to make the right adjustments. To that end, Credit Suisse has a handful of ideas how traders can navigate these choppy waters.
But before we get into those specific recommendations, it’s important to recognize Credit Suisse’s base case for stocks going forward. The firm thinks the market will continue to grind higher through 2019 for two mains reasons.
First, even though earnings and gross domestic product (GDP) expansion are both expected to slow, Credit Suisse says the reduced growth will be “more than sufficient to fuel a market advance.” Second, the firm thinks moderate economic growth will take pressure off the Federal Reserve as it hikes rates, leading to a “soft landing” that won’t rattle markets.
The chart below shows this second dynamic in action. After spending 2018 above its historical trend, Credit Suisse says GDP will normalize.
With all of that established, it’s now time to reveal the four big portfolio adjustments being recommended by Credit Suisse, with full rationale included. All quotes attributable to the firm’s chief US equity strategist, Jonathan Golub.
(1) Pile into healthcare — CS has adjusted its sector rating to overweight from marketweight
“This less cyclical sector should deliver strong relative performance in a decelerating economy.”
(2) Increase holdings of consumer staples — CS has adjusted its rating to marketweight from underweight
“While less economically sensitive, this sector carries a below-market growth rate and a premium valuation.”
(3) Reduce exposure to financials — CS has adjusted its rating to marketweight from overweight
“A decelerating, non-recessionary economy should support solid loan performance but weaker loan growth.”
(4) Cut holdings of industrials and materials — CS has adjusted its rating to underweight from marketweight
“These sectors are the most cyclical of any, and should struggle in light of decelerating growth.”