Investors' concerns about a potential pullback in the market were confirmed on Tuesday as the S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) posted their biggest declines since before the election of Donald Trump as President. With that in mind, strategists at Credit Suisse cited the potential of a "pullback short term" and published a list of investment options in their First Edition - U.S. Alert report as the market headed down on Tuesday. Credit Suisse is uncertain about the direction of U.S. economic policy, but it nonetheless is bullish about longer term economic prospects, and recommends buying on the dips. They see a pickup in share repurchases as a positive signal.
Here's a look at the firm's view. Investopedia notes that two of the sectors recommended by Credit Suisse, financials and biotechs, took a drubbing on Tuesday, though the markets returned to stability around noon Wednesday.
Credit Suisse is positive on small cap stocks longer term, seeing attractive valuations relative to large caps. To whatever extent corporate tax rate cuts and protectionist measures eventually get enacted by Congress, Credit Suisse is among those who expect bigger positive impacts on small caps than on large caps. They thus recommend buying small caps if the market retreats. (For more, see also: Why Trump's Small Cap Rally Is Flaming Out.)
Credit Suisse remains most overweight in financials, but prefers insurance and diversified financials to banks. They also continue to be overweight in media, commercial and professional services, and transportation. Their favored defensive sectors are, in order of preference, pharmaceuticals, biotech and life sciences, plus health care equipment and services, REITs, telecommunications, and household and personal products.
They upgraded pharmaceuticals, biotech and life sciences from market weight to overweight. Despite strong recent stock price performance, Credit Suisse sees slightly attractive large cap valuations and reasonable valuations in small caps within this sector. Earnings momentum is near a historic low, Credit Suisse says, and thus seems poised for a rebound. Meanwhile, they see funds flows in health care stabilizing and turning slightly positive.
To get more specific, Credit Suisse prefers biotech and life sciences from a valuation perspective, and biotech based on earnings momentum. In a rising interest rate environment, they find pharmaceuticals to have less downside sensitivity than the other two groups. (For more, see also: The Fed, Wall Street, Economists Love Interest Rate Hikes.)
Credit Suisse has downgraded retail, consumer durables, and apparel to market weight from overweight. In particular, they find that proposals in Congress for a border adjustment tax represent a key risk for these import-dependent sectors that is not yet fully priced in. Earnings momentum is falling, and though significantly undervalued relative to other industries, Credit Suisse anticipates that these sectors can go yet lower. They anticipate net selling by mutual funds and hedge funds, further depressing prices. Within retail, Credit Suisse finds that online merchants have expensive valuations and tend to underperform in rising interest rate environments. For specialty and multi-line retailers, Credit Suisse's earnings revisions indicators have been falling.