This guide outlines the upsides and pitfalls to watch out for in your investment strategy for the coming economic changes.
These are interesting times for US investors, and trying to get a handle on the US economy and attempting to predict what will happen next is testing everyone’s investment strategy.
Investment strategy overview
What is GDP going to do in the next two quarters? Where will inflation be by the end of the year? What will the stock market do next? The answers to all of these questions will remain best guess for most of the year. That said, there are factors to bear in mind when you are considering your investment strategy for the year ahead, which may help you to maximize your return, or at least, minimize your downside.
Inflation still rules
Inflation is still first, second and third on the list of things for the Federal Reserve to worry about. Every sector of the economy was hit, including investment. It is far from certain, despite the six interest rate rises of 2022, that inflation will reach the Fed target of 2% in 2023. It is also possible that the Fed may come under pressure to lower interest rates a touch, which won’t help the fight against inflation.
The bottom line here for your investment strategy is that inflation will remain a big factor in 2023, and investment options such as the Treasury Inflation-Protected Securities (TIPS) will continue to be popular.
Consider investment strategy alternatives
When it comes to diversification, alternative investments could be a good investment strategy for adding to portfolios in 2023. These investments have a low correlation to traditional assets such as bonds and stocks, and could help to offset the effects of inflation or even recession-related volatility.
Although this form of investment was previously only for seasoned traders and accredited investors, the wider investor market now has access to alternative investments through a range of exchange-traded funds (ETFs) as well as mutual funds. The costs of these investments may be higher, but that may be offset by their stronger performance during a period of volatility.
Don’t overlook savings bonds
One of the few positives of rising inflation has been the rediscovery of savings bonds. Series I savings bonds in particular have been a popular investment strategy. In April last year, the I bond rate reached 9.62%, which represents a historic high.
On October 28, the last purchase day before the rate reset, investors bought a massive $979m in I bonds. These bonds are still attractive at the lower rate of 6.89% until April 30, 2023, and provide a guaranteed rate of return, backed by the US government.
Be wary of cryptocurrency
For crypto investors, 2022 was about as bad as it gets. The midyear crash took out hundreds of billions in value, and the sudden collapse of FTX was another blow. Crypto exchanges, not surprisingly, had a turbulent year and there were significant layoffs, most notably at Coinbase.
In response, 2023 may see crypto businesses emphasizing their cash reserves rather than their high-profile endorsements. At the same time, the Fed will be moving ahead with crypto regulation throughout the year, and legislation may be on the cards. For now, however, despite the untapped potential of crypto, it remains an area of investment strategy to treat with extreme caution.
Renewed interest for renewables
Climate change was ever-present in the news throughout the year, and although supply chain issues have been a problem in this area of the economy, the investment strategy prospects for 2023 look brighter. For one thing, the 2021 $1.2tn infrastructure bill and the 2022 Inflation Reduction Act open the floodgates for massive federal investments in the renewable energy sector.
Electric vehicle (EV) companies are on the front line in this sector and there is likely to be significant competition between the likes of Rivian, Ford and Chevy, threatening the dominance of Tesla and Toyota. And behind the EV sector, the ongoing natural gas shortages in the EU, due to the Russian invasion of Ukraine, have increased demand for renewable energy sources.
Keep an eye on China
China has faced a number of challenges in recent months and in 2022, the housing market and the government’s Covid-19 policy have been the most significant.
Yet there is reason to watch the Chinese economy closely. Following widespread protests, the government has introduced significant easing of the notoriously strict Covid protocols, which ought to ease some of the domestic volatility as we go into 2023. On housing, the easing of the lending model, with the removal of some borrowing restrictions, could see an increase in housebuilding and a recovery among some sectors of the property markets, which could encourage growth in a number of areas.
At the same time, investors should be wary of the effects of potential disputes between the US and China, and of the effects of geopolitical pressure on the country.
Look closely at the healthcare sector
The US healthcare sector remains an area with plenty of investment strategy potential for those who are able to find growth opportunities. Low current profitability limited the impact of healthcare innovation in 2022, but the bigger picture on healthcare is promising, with consistent demand and a number of late-stage trials reaching fruition throughout 2022-2023, particularly in the fields of gene therapy, immunology and neuroscience.
At a time of economic volatility and turbulence, it is worth noting that healthcare spending in the US has increased in all but one of the last 50 years.
Pick your tech targets
This year has been tough for tech investment strategy, as many of the gains of 2020 and 2021 were handed back due to fears that higher interest rates and the looming end of the economic cycle would be tough on the sector, but 2023 could present more opportunities, as long as you pick your targets.
With cyber-attacks increasing dramatically since the end of the pandemic, cybersecurity could be one tech sector that enjoys a strong 2023, along with robotics, and both sectors may benefit from an increasing focus in the US on encouraging domestic development, indicated by the CHIPS and Science Act, which targeted $53bn on supporting American semi-conductor development.
