BofA’s US stock chief sees a floor of 3,200 for the S&P 500 (potential downside of 22%) — but here are 4 sectors she likes for inflation protection and cash return
We’re almost halfway through the year, and sentiment has yet to turn bullish.
The S&P 500 is down 13% in 2022, while the tech-centric Nasdaq is off 22%.
If you want to know how low the market could really go, pay attention to what Savita Subramanian — head of U.S. equity and quantitative strategy at Bank of America Securities — has to say.
“We calculate that a floor on the market is 3,200, even in a recession case,” she told Bloomberg earlier this week.
The S&P 500 currently sits at roughly 4,100, so that market floor call represents potential downside of around 23%.
But that doesn’t mean you should bail on stocks.
“I do think that equities offer inflation protection and cash return,” she added.
Not all sectors are the same, though. Subramanian suggests investors look into energy, financials, healthcare, and consumer staples.
“These are areas of the market that are less susceptible to the vagaries and the negative impacts of inflation but can actually benefit from a pickup in inflation and are relatively healthy and paying healthy dividends relative to fixed income and other parts of the capital spectrum.”
Let’s take a closer look at those sectors – and see how investors can get easy access to them.
Fueled by rising commodity prices, energy was the S&P 500’s best-performing sector in 2021, returning a total of 53% vs the index’s 27% return. And that momentum has carried into 2022.
Year to date, the Energy Select Sector SPDR Fund (XLE) is up a whopping 55%, in stark contrast to the broad market’s double-digit decline.
XLE aims to track the performance of the S&P 500’s energy sector. If the positive momentum in energy prices continues, the ETF is a good bet to keep delivering market-topping returns.
XLE also provides a good starting point for further research if you are looking for individual picks. Its top holdings include oil giants like Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP).
To tame spiking inflation, the Fed raised its benchmark interest rates by 50 basis points on May 4, marking the first half-point increase since 2000. Similar moves are expected to occur at the Fed’s upcoming meetings in June and July.
Many businesses fear rising interest rates. But for certain financials, like banks, higher rates are a good thing.
Banks lend money out at higher rates than they borrow at, pocketing the difference. As interest rates increase, this earnings spread widens.
Banking giants are also well-capitalized right now and have been busy returning money to shareholders.
Last year, Bank of America boosted its quarterly payout by 17% to 21 cents per share. Morgan Stanley doubled its quarterly dividend to $0.70 per share. And JPMorgan increased its quarterly rate by 11% to $1 per share.
Investors can also get exposure to financial stocks through ETFs like the Financial Select Sector SPDR Fund (XLF) and the Vanguard Financials ETF (VFH).
Healthcare serves as a classic example of a defensive sector thanks to its lack of correlation with the ups and downs of the economy.
At the same time, the sector offers plenty of long-term growth potential due to favorable demographic tailwinds — particularly an aging population — and plenty of innovation.
Average investors might find it difficult to pick out specific healthcare stocks. But healthcare ETFs can provide both a diversified and profitable way to gain exposure to the space.
Vanguard Health Care ETF (VHT) gives investors broad exposure to the healthcare sector.
To tap into specific segments within healthcare, investors can look into names like iShares Biotechnology ETF (IBB) and iShares U.S. Medical Devices ETF (IHI).
Consumer staples are essential products such as food and drinks, household goods, and hygiene products.
We need these things regardless of how the economy is doing.
When inflation drives up input costs, consumer staple companies — particularly those with scale and distribution advantages — are able to pass those higher costs onto consumers.
Even if a recession hits the U.S. economy, we’ll probably still see Quaker Oats and Tropicana orange juice — made by PepsiCo (PEP) — on families’ breakfast tables. Meanwhile, Tide and Bounty — well-known brands from Procter & Gamble (PG) — will likely remain on shopping lists across the nation.
You can gain access to the group through ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) and the Vanguard Consumer Staples ETF (VDC).
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