- Stocks have rallied in recent months in the face of conflicting economic data.
- Alicia Levine of BNY Mellon Wealth Management thinks a recession is likely in the next 12 months.
- Here are three “rolling bubbles” to avoid in the market — and five sectors to target.
Alicia Levine, the head of equities capital markets advisory at BNY Mellon Wealth Management, doesn’t think there’s a clear-cut answer right now.
“This is one of the most complicated environments for investors that I can remember, simply because there are a lot of cross-currents,” Levine said in a recent interview with Insider.
Levine continued: “So you had two quarters of negative GDP growth in row, and yet you had a blowout labor report from one of the months. So it’s just really complicated with the 40-year-high inflation and how that’s affecting consumer behavior.”
Investors have recently taken a glass-half-full view, opting to look past signs of a slowing economy and instead focus on the remarkably resilient job market, the possibility of peaking inflation, and better-than-expected Q2 earnings reports.
Still, Levine believes it’s more likely than not that the US will officially be in a recession — albeit a shallow one — in the next 12 months. She says that while inflation might not rise further, it’s still historically high and will weigh on both consumer spending and corporate profit margins.
“While activity appears strong today, there are certainly signs that the consumer is struggling, that corporates are struggling,” Levine said.
Avoid “rolling bubbles” in the stock market
A weakening economy isn’t all that investors need to be wary of. Levine warned against betting on parts of the stock market that she called “rolling bubbles,” which are trendy industries that are more sizzle than substance — at least in the short-term. Examples in recent years include pandemic winners like Zoom (ZM) and Peloton (PTON), as well as several green energy names.
“What we’re seeing are these rolling bubbles,” Levine said. “You go from the stay-at-home bubble to the reopen bubble to the travel bubble, the housing bubble, and then they roll over.”
There are three industries that investors should consider steering clear of, Levine said: travel, apparel, and back to school. All three have a seasonal component that was once a strong tailwind but will soon be an obstacle, the equities head said.
“The travel that we’re seeing is clearly an excitement about getting back to life,” Levine said. “But when summer is over, you may not have that kind of demand going forward. It’s not a linear relationship. So we think that effect could roll over as well.”
Like travel, demand for apparel also shot up as people returned to work and attended events like weddings, Levine said, but the concern now is that purchases of those goods got pulled forward and will soon begin to decline. For example, items like shoes, suits, and dresses usually don’t need to be replaced often, so people who bought them recently may not need to do so again for a while.
Similarly, back-to-school items like laptops and classroom supplies appear to have been purchased in a frenzy but demand might not be as high as it once was in the coming months.
“I heard somewhere that back to school at one of the large-box stores was up 27%,” Levine said. “So that is amazing. It’s far above trend, and that will come down also.”
How to invest in a shifting market
Beating the broader market is so difficult for investors because it involves not only predicting what future trends will be but also when they’ll occur. Knowing which market trends have more room to run and which should be faded takes skill, wisdom, and a bit of luck.
“This market’s really quickly moving, and we’re trying to position for being on the other side of it,” Levine said.
Levine said that five stock market sectors stand out right now: defensives like consumer staples, healthcare, technology, and utilities, as well as the more cyclical industrials.
Certain staples and tech companies are calling for lower demand going forward, Levine noted, but both sectors also include companies that can sell products in any environment. A solid report from Walmart (WMT) on Tuesday alleviated some concerns about consumers’ health. Meanwhile, large-cap tech names will benefit as bond yields fall, Levine said.
Healthcare companies and utilities should also do well if the economy slows because of the nature of their businesses. Levine said that she likes healthcare services companies like hospitals and HMOs — or health maintenance organizations — the most.
Lastly, industrials should benefit from the trend of companies moving their operations back to the US, Levine said, especially as geopolitical conflicts continue to escalate this year.
“We think there will be strong capex in the US, both on the digital side and on the physical plant side, as companies reshore,” Levine said. “That seems to be a theme, really, across many industries — trying to bring industry back here.”