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The Tell: Barclays says cash may be ‘real winner’ in 2023 while recommending bonds over stocks

Cash should be “the real winner” in 2023 while bonds are preferable to stocks, according to Barclays.

“In the U.S. in particular, investors will soon be able to make 4.5% a year or more sitting on cash as they wait for asset markets to bottom,” Barclays analysts said in a research note Wednesday. Stocks are “likely to bottom out” in the first half of next year, they said. 

In their view, global equity markets may “drop significantly further” despite this year’s drawdown. U.S. stocks tend to bottom 30% to 35% below their peak in the middle of a recession, which suggests a “fair value” of 3,200 for the S&P 500 index at some point in the first six months of 2023, the analysts said.

The Federal Reserve has been aggressively tightening monetary policy to cool demand in the economy and bring down high inflation, leaving investors worried that its rapid pace of interest rate hikes risks triggering a U.S. recession. “This U.S. recession has not yet started, which is why a trough is most probable in the first half of next year,” the analysts said. 

They recommended fixed income over stocks after bonds “massively underperformed” equities this year. There’s now “limited downside in longer U.S. fixed income,” according to their note.

Read: More trouble is brewing in the $24 trillion Treasury market: This time, it’s about central clearing

“If forced to choose between stocks and bonds, we would be overweight core fixed income over equities,” the analysts said. But cash is a “low-risk alternative” that should win in 2023 as U.S. “front-end yields” are likely to go to at least 4.5% and “stay there for several quarters,” according to the report. 

“The ability to earn over 4% while taking virtually no risk is a factor that should drag on both stock and bond markets next year,” the Barclays analysts said. 

So far this year, the S&P 500 index

is down almost 17%, while the blue-chip index Dow Jones Industrial Average

is off nearly 8% and the technology-laden Nasdaq Composite has suffered a steeper slide of about 28%, according to FactSet data based on Wednesday afternoon trading.

Last week U.S. stocks rallied after a consumer-price-index report indicated that inflation in October rose less than anticipated, with the data pointing to signs that the soaring cost of living in the U.S. may be easing. 

“Despite the recent euphoria over the last CPI report, monetary policy risks have not receded,” the Barclays analysts cautioned. “Prior weak inflation prints in March and July were followed by upside surprises in subsequent months.”

As for company earnings in 2023, the analysts see “the biggest downside risks” in the industrials, discretionary and materials sectors. Defensive sectors such as healthcare, consumer staples and utilities should “hold up better,” they said.  

“The world is set for one of its weakest years of growth in decades,” the analysts wrote. “And unlike in past recessions, monetary policy will remain restrictive even in the throes of the coming downturn.”

U.S. stocks were trading lower Wednesday afternoon, as investors digested a report from the Commerce Department that showed the rise in retail sales last month was slightly above expectations. The S&P 500

was down 0.7% at around 3,963, while the Nasdaq

fell 1.3% and the Dow

slipped 0.1%, FactSet data show, at last check.

“Retail sales boomed in October, rising 1.3%, increasing by the most in eight months,” economists at First Trust Advisors said in a note Wednesday. “Ultimately what the data show is that the Federal Reserve needs to stay the course and continue to tighten monetary policy.”

Read:Traditional 60/40 strategy may start to work again for investors, but ‘tightening cycles can be scary,’ Goldman exec says

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