5 Smart Money Moves to Survive a Recession in 2023

Three leading investment managers agree that 2022 was rough for investors—but they see five pathways to success in 2023.

Stock valuations, as measured by price-to-earnings, are still high, Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, tells Fortune magazine.

With the average S&P 500 stock P/E above 20 and inflation at 7.1%, “the relationship between the market multiple and the inflation rate was completely out of whack—just really untenable,” Subramanian says.

Georgia Lee Hussey, founder and CEO of Modernist Financial, expands on that point, saying, “Everyone’s got their wounds to lick from this year. The S&P is down 20%. And when you look at a 60/40 portfolio (60% invested in equities, 40% in bonds), it’s very hard to find a time when things were worse. But that is where future returns come from.”

1.) Dividend Stocks

High stock valuations are why BofA Merrill Lynch has been recommending and moving clients’ money into dividend-paying stocks, “one of the best ways to protect against an inflationary environment,” Subramanian says.

If you owned dividend-paying companies in the second-highest quartile of the Russell 1000 large-cap index over the past 10 years, Subramanian says, “you would have outperformed every other cohort of the market: the high-flying, no-dividend-yield, zero-paying stocks, the super high-dividend yield—with this ‘Steady Eddie’ strategy.”

2.) Energy Sector

To that point, and despite the ongoing popularity of environmental, social and governance (ESG) stocks, Subramanian and Josh Brown, CEO of Ritholtz Wealth Management, are very bullish on energy stocks—which are up a whopping 65% this year.

Subramanian points out that the energy sector is currently offering nine percentage points higher free cash flow than Treasury Inflation-Protected Securities. “That’s a huge spread that you’re getting,” she says.

Even for investors very aligned with ESG investing, many oil and gas companies are diversifying into green energy, Brown notes.

One such example is NextEra (NEE): “I want to talk about NextEra, an energy company that owns Florida Power and Light, which is as staid and boring a utility as you could possibly imagine,” Brown says. “However, that’s only half the business. The other half is this massive, fast-growing renewables company, where they’re building out renewables infrastructure for other utility companies and large-scale corporations.

“On a five-year look back, NextEra is up 126%; the S&P up 61%,” Brown continues. “This is a stock that is paying a dividend, acting like a utility, but has a premium return because they’re thinking about, ‘How do we power the next century?’”

3.) Financial Sector

BofA Merrill Lynch is also bullish on financial stocks because they also weather inflation and recessions well.

Financial companies are well diversified and have lines of businesses that benefit from rising interest rates.

Subramanian explains: “If you look at financial companies, they tend to grow earnings during inflationary periods, and earnings are nominal, unlike bond yields. And financial companies are still relatively inexpensive.”

Another factor to consider is how aggressively financial companies and banks have been at laying off staff ahead of any financial downturn.

4.) Bonds

BoFA Merrill Lynch is also encouraging clients to move out of cash into bonds, even though they have been negative in the past two years.

As Subramanian puts it, “When you look at bonds, instead of getting zero in your cash, you might as well move into a three-month T-bill or a two-year bond. If you’re looking for yield and you can take a little bit of risk, the credit markets are starting to look really attractive.”

5.) Remain Invested

Ritholtz Wealth Management has an investment mandate that permits it to move quickly into all cash when its analysts believe stocks are in a bear market, Brown says. “So, by the end of February, we were completely out of the Nasdaq. And by the end of April, we were completely out of the S&P 500,” he says.

Most investors, even professional money managers, simply don’t have tactical foresight when to time the market. That’s why the investment pros who Fortune interviewed, including Brown, believe the best thing for investors—unless they need the money immediately—is to stick with their portfolios, even in periods of volatility.

Hussey says that’s why her investment firm has been working with clients to build cash positions. Even for investors that don’t have significant means, Hussey believes, it is important not to “panic in the bottom.

“Do the really radical thing—which is to not do a damn thing.”