Market strategist: 2023 will bring ‘an inflection’ in inflation and growth

UBS Global Wealth Management Senior Equity Strategist Americas Nadia Lovell joins Yahoo Finance Live to discuss economic growth going into next year, inflationary pressures, the bear market, the potential for a recession, the energy sector, and the outlook for markets.

Video Transcript

- Welcome back to "Yahoo Finance Live" this morning, everyone. Weighing the odds-- futures are slightly in the green on this Thursday morning after five straight days of losses for the S&P. This as the market considers the likelihood of a downturn during an inflection period of change. Joining us with her insight, we've got Nadia Lovell, who is the senior US equity strategist over at UBS Global Wealth Management. Great to have you here with us today. First and foremost, when you think about this inflection, what are some of the characteristics that would really have some outsized weight as we even go into 2023?

NADIA LOVELL: Thank you so much for having me. I mean, we're thinking about inflection not only from an inflation standpoint, but also from a growth standpoint. We do think the peak in inflation is behind us. But inflation is likely to remain elevated into the first half of next year.

That also means also from a growth standpoint, we think that growth is going to be inflecting downward in the first half of the year. We're likely to see a recession, as we know the Fed has been an aggressive path of hiking monetary policy and hiking interest rates. And we're going to feel the full effect of that into 2023. And so we're likely going to see an inflection in growth in the first half of the year into a recession and then sort of a reacceleration of growth as we head into 2024.

That also means that's going to have an impact on corporations as well as the market. And so we think that this is a market that is going to continue to struggle into the first half of the year. And we're likely to continue to see a bear market.

- Well, Nadia, you've been adding to the drumbeat that we've gotten of quite a lot of negativity, or at least a lot of caution, right, in this market. So given that, what do you do? I know that you guys are looking at defensives, which a lot of folks are looking at right now. At what point do you worry about trades like that getting too crowded because there is a lot of caution being expressed by investors right now?

NADIA LOVELL: We don't think that we're there yet because we don't think that the earnings revisions that we need to see happen in the broader market-- we think that expectations for growth are still too high. And so we think that that's going to come down in the first half of next year. And when we think about defensives, we're talking about those more traditional defensive sectors, so consumer staples. People are going to still need essential products, despite an economic slowdown. Also health care, there's still going to be a demand for drugs and health-care services despite the slowdown.

I would also put energy in that bucket. Now, energy is traditionally a more cyclical sector, a sector that's more sensitive to economic growth. But in this cycle, we just think that it's different. Russia's war in the Ukraine this year has really disrupted the energy market.

And also, we've all seen all the news reports over the last couple of weeks around China and reopening of China. Remember, China is the second largest consumer of oil. And so as that economy reopens, it's going to put upward pressure on the oil prices. And that's going to help the energy sector. And so we would also put energy in sort of that more cyclical defensive bucket, if you will.

- Nadia, you and the team write at length about this concept of the decade of transformation. What defines that? And how could the average investor invest in it?

NADIA LOVELL: Yeah, when you think about a decade of transformation ahead, you also want to think about it not only from an energy standpoint in terms of clean energy and the move towards the energy transition, but you also want to think about it from a cybersecurity standpoint. And also I think that this war that's happening in the Ukraine, we think that that is going to highlight the need for additional security and the transformation of the security. So think about it also from a food security standpoint. And how do we get food in a safer and a more efficient way to a growing population?

- We were just talking about why some retail investors might favor some tech names going into 2023. But as you think about the amount of spending that's still going to take place, the uncertain employment environment and what that headcount will actually look like at many of those companies, and we don't know when advertising revenue is still going to come back in full force, what would you be tracking most notably within tech?

NADIA LOVELL: I think we're continuing to watch enterprise spend. And, I mean, enterprise spending is being called into question in tech right now. We know that tech benefited quite a bit from the pandemic. And there was some pull forward in demand.

We already know that there is weakness in the PC market. We already know that there's weakness in the smartphone market. But we're also now starting to see that deals are just taking longer within enterprise spend as companies really tighten the belt. So we want to continue to watch that.

I think also, as we know, any sort of economic downturn as companies rein in expenses, one of the first areas that they look to cut, [AUDIO OUT]. And so we think that that's likely [AUDIO OUT]

- I think we're having some-- a little bit of a--

NADIA LOVELL: When the economy [AUDIO OUT].

- Nadia, I think we're having some trouble with your connection, but really appreciate your insights, very, very helpful as investors look toward next year. Nadia Lovell, senior US equity strategist at UBS Global Wealth Management, thanks so much. We appreciate it.