Kelly Cox, an investment analyst at eToro, has highlighted the 2 biggest risks to watch for in the U.S. stock market this year and advised how investors should position themselves ahead of a potential recession in the U.S., writes Business Insider.

According to her, this year the U.S. economy will either avoid recession or slip into it, and the 2 biggest risks to watch for in 2023 are the ability of the Federal Reserve to curb inflation and the possibility of a sharp economic downturn.

The analyst pointed out that consumer inflation has stabilized in a few months (the CPI rose 6.5% year-over-year in December, up from 9.1% in June), though still well above the Fed’s 2% target, and services inflation is still around 7% per year, which is too much for the Fed.

The fact is that services inflation is the type of inflation that the Fed can best control through the labor market, and it is most dependent on demand. It is service inflation that can give the Fed enough reason to keep the rate high, and the longer the rate stays high, the more likely it is that there will be a recession.

In this case, the market bottom has already occurred – in October 2022 – which means the bull market has begun. And this is the best-case scenario, although it presents a challenge for investors, as still high interest rates will hinder the recovery of growing sectors of the market.

The second, even more painful scenario is a deep recession with a sharp rise in unemployment and a 20% drop in incomes. That said, when demand falls, so does inflation.

Her advice on how to invest in 2023 applies to bonds, which can be a stable investment during an economic downturn, and a safe bet when inflation slows and economic growth is minimal.

And as for stocks, she favors consumer staples, utilities, energy and pharmaceutical companies, because even in a recession, you still need to eat, you still need energy, and people can still get sick and need medicine.

She recommended such stocks to cushion the portfolio from negative market swings, and to consider quality risks, such as healthy technology companies with large balance sheets, and cyclical rate-sensitive stocks, such as real estate and consumer staples.
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