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Goldman: We don't like stocks here

Goldman Sachs thinks that being defensive on stocks is the best bet headed into a 2023 that may see a long-talked about U.S. recession.

"We remain relatively defensive for the three-month horizon with further headwinds from rising real yields likely and lingering growth uncertainty," Goldman Sachs strategist Christian Mueller-Glissmann wrote in a note to clients on Monday.

Mueller-Glissman recommended that investors go overweight (have more exposure to) cash and credit in the near-term. The investment bank, which is underweight (have less exposure to) bonds and stocks, sees opportunities to "add risk" in 2023 — but the moment isn't now.

Traders work on the floor of the New York Stock Exchange during afternoon trading on September 13, 2022 in New York City. (Photo by Michael M. Santiago/Getty Images)
Traders work on the floor of the New York Stock Exchange during afternoon trading on September 13, 2022 in New York City. (Photo by Michael M. Santiago/Getty Images)

"Without depressed valuations, for markets to trough investors need to see a peak in inflation and rates, or a trough in economic activity," Mueller-Glissmann added. "The growth/inflation mix remains unfavorable – inflation is likely to normalize but global growth is slowing and central banks are still tightening, albeit at a slower pace."

Investors, meanwhile, have sought to look beyond the negatives in the market in recent weeks.

Amid signs of an easing in inflation, lower oil prices and a renewed drop in the U.S. dollar, stocks have rallied since those the October lows. In the past month, the Dow Jones Industrial Average (^DJI) is up 7.9%, the S&P 500 (^GSPC) has gained 4% and the Nasdaq Composite (^IXIC) rose slightly.

However, those gains have begun to crumble as concerns mount over a contentious COVID-19 lockdown situation in China and how large manufacturers such as Apple and Tesla will be impacted.

"Our key point for now is that investors who conclude that: (1) protests will lead China to loosen Covid restrictions in the near-term; and (2) that this would bring relief to the economy, are likely being overly optimistic on one or both counts," 22V Research strategist Michael Hirson wrote in a note.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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