As of Jan. 16, 2023

Volatility is likely to persist for the first few months of 2023 as stocks continue to face many of the same headwinds from 2022.

Here are four investing strategies to consider as you evaluate your approach to equities for the year ahead:

1. Stay agile to take advantage of lower valuations

We anticipate 2023 to be a somewhat bifurcated year for returns. At the start of the year, equities are likely to experience elevated volatility as the market grapples with the headwinds of inflation, higher interest rates, and lower-than-expected corporate profits. But eventually, we forecast the S&P 500^® Index to trade higher on a return-to-earnings growth at more attractive valuation levels. (Our 2023 year-end target for the S&P 500 reflects an increase of 10.4% from current levels.)

While trying to time the market is unwise, a rocky start to 2023 could provide an attractive entry point for investors. As the year progresses, look for appealing valuation levels to begin positioning for an eventual return to stronger economic growth.

Bottom line: All bear markets eventually end. Stay agile and be prepared to take advantage of lower valuations to position for growth and more cyclical sectors of the economy.

2. Consider a defensive positioning to begin the year

At the onset of 2023 — as the economy struggles to digest the lag effects of higher interest rates, inflation, and slowing growth — we believe equity investors could benefit by adopting a “3-D” strategy:

1. Defense: Overweight defensive sectors of the market as consumers focus on buying what they need versus what they want. Amid higher volatility, resist the allure of buying the dip on down days, hoping for a quick rebound. Instead, consider sticking with the traditionally defensive sectors, including consumer staples and health care.
2. Dividends: Dividends worked well in 2022, and we believe they could continue to offer an attractive niche in a volatile market. However, with interest rates expected to remain elevated for longer, we suggest investors focus on dividend growth rather than dividend yield.
3. Diversification: Chasing short-term sector or factor returns can result in underperformance and frustration. The primary benefit of diversification is reducing risk and smoothing out portfolio returns by not being over-exposed to one specific economic or market segment. Adhere to a balanced allocation with an eye toward staying agile in what we anticipate will be a fluid investing environment.

Bottom line: Stay defensive with sector positioning to start the year and focus on dividend growth and quality.

 3. Lean into quality companies

In our view, the lag effect of the Fed's rate hikes and stubbornly high inflation on the real economy could create a more difficult near-term operating environment for corporations. In addition, recent layoffs in the technology sector remind investors that companies (even highly successful ones) must right-size their business to reflect a more muted demand environment.

In this post-pandemic, higher-risk premium market, we believe stocks with quality characteristics could offer some refuge for equity investors. As a reminder, in our view, quality companies are firms with high profitability, stable earnings, and a low balance sheet debt.

Bottom line: Historically, high-quality stocks outperform their lower-quality counterparts and the broad market over time. Importantly, quality stock outperformance is often high during periods of macroeconomic uncertainty and stock market volatility.

 4. Resist fads and focus on fundamentals

In 2023, we believe a “return to fundamentals” can retake its rightful place as the preferred analytical methodology that helps determine winning stocks from losers.

For several years, fad or “story” stocks were in vogue as investors focused on fast-growing new market opportunities, often disregarding traditional fundamentals. Historically low interest rates following the pandemic fueled investors’ euphoria, enabling companies with no cash flow or profitability to reach dizzying valuation levels. However, in 2022, the fad stock allure faded in the wake of the fastest Federal Reserve interest rate hike cycle in history.

In our view, focusing on fundamentals in the current macro environment can uncover attractive investment opportunities with a lower risk profile. That’s because fundamental analysis looks at the company's underlying business, market position, profitability, management team, debt levels, and capital allocation strategy, among other factors.

Bottom line: Resist the allure to “catch a falling knife” with high-risk fad stocks in hopes of attaining a previous valuation level that may never come to fruition in today's market environment.

Your financial advisor is here to help you navigate the 2023 stock market

With elevated volatility likely to persist in the beginning of 2023, remember that your Ameriprise financial advisor can help guide you through uncertainty. If you have questions about any of the above strategies, reach out to them to discuss.