Economy to face slowdown in early 2024 so stay in defensive stocks, Wells Fargo's CIO says

Published Wed, Dec 6 202311:28 AM EST

Investors should focus on defensive stocks ahead of an expected economic slowdown in 2024, according to the Wells Fargo Investment Institute. "Economic crosswinds will precipitate a moderate U.S. economic slowdown by the early part of 2024, in our view, reducing the annual growth rate to 0.7% in 2024 from our 2.2% forecast for 2023," wrote Darrell Cronk, Wells Fargo Investment Institute president and chief investment officer for wealth and investment management, in the firm's December outlook. "Cascading weaknesses are already apparent from sequential slowing of manufacturing, housing and oversees growth." Against this forecast, Cronk added that investors may have to wait until the second half of 2024 before visibility improves and markets meaningfully recover. Until the tide turns, Cronk recommends "a patient and diligent focus on quality in equity markets" where he favors U.S. large cap stocks most positively as well a specific focus on quality and defensive sectors. After the market turns higher later in the year, it will end up in the range of 4,600 to 4,800, according to Cronk's official forecast. The S & P 500 was trading around 4,572 on Wednesday. Late economic cycle Cronk's 2024 outlook comes as fresh economic data showed private payrolls increased at a smaller-than-expected clip on Wednesday, which underpinned investor optimism on both inflation and helped push stocks higher. Wednesday saw stocks climb after two back to back losing sessions for both the Dow Jones Industrial Average and S & P 500 . "The lack of market breadth (along with our expectation for an economic slowdown) suggests late-cycle dynamics are at play, leading us to maintain our defensive positioning entering 2024," he said. Cronk highlighted health care, industrials and materials as three key market segments that fit his suggested defensive investor focus. "The health care sector is often termed a defensive sector for good reason," Cronk said. "We believe the combination of sound earnings stability, solid underlying secular demand trends from the combination of an aging population and technological advances, and generally attractive valuations provide a favorable backdrop." And although Cronk says both materials and industrials are more cyclical in nature, "each currently enjoys the potential for durable tailwinds" that could "insulate them from the economic downturn while also allowing participation in any cyclical rallies." -- CNBC's Michael Bloom contributed reporting.