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As we enter a new month and a new quarter, we are at a clear crossroads in terms of messages the market is sending.
The most defensive of sectors — utilities (up over 10 percent year-to-date, as of Monday’s close) and healthcare (up just over 5 percent for the same period) — are still leading the general market as investors try to discover whether last year’s 30 percent or so gains are durable, or if there were some overly-exaggerated bids to the upside that just won’t stick. Kudos to our Weiss Ratings for signaling this ahead of time.
But that’s in the rear-view mirror.
Now, our Weiss Ratings are telling us that it’s also time to expand your horizons to other areas that have been performing well recently — energy (up 0.78 percent year-to-date), financials (up 2.6 percent) and technology (up 2.2 percent) and even materials (up 2.8 percent).
Here’s a quick rundown of each …
Energy is a sector where short-term valuation judgments and stock performance depend more on current commodity prices (oil and gas price trends) than they do on long-term value creation. That’s normal for these stocks.
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| The growth in tech manufacturing will eventually propel the rest of the global economy forward. |
Over the longer term (anything over 12-18 months), though, fundamentals end up mattering to this sector in economically-predictable ways. This so-called “predictability” is typically tied to the economic cycle. But this time around (the economic recovery period since 2009), there is another sector-specific wrinkle tied to intrinsic valuation: The outsized growth of non-conventional fossil-fuel recovery methods (fracking, et. al). This shift in approach toward extraction is changing the earnings profiles of several industries within the sector, and we’ll hear much more about this during first-quarter earnings season.
Financials, which I have highlighted before, seem to be defying gravity. It’s clear, for instance, that interest rates are bound to go up over the next 12-18 months. Therefore, financials should be the first to suffer. And in the very short term, that’s true. Higher interest rates make it more expensive for a financial institution, such as a bank or an insurer, and for the end-customer to borrow.
However, the financial institution has the opportunity to arbitrarily boost its rates to end customers. So, after an adjustment period, higher rates can actually be beneficial to these players. I plan to dig in deeply to the next act of the financial crisis recovery trend, where large changes in balance sheets will expose the best candidates for long- and short-term investment.
Tech and materials are normally thought of as diametrically opposed sectors. Still, we have to allow for the fact that the biggest economic growth rates over future years are expected in the emerging markets. These are the same markets where a lot of tech gear is actually made (and where workers are paid for making it). Changes in standards of living in these manufacturing countries will eventually propel the rest of the global economy forward.
The “big ugly” type companies are the best to focus on when this trend finally hits its tipping point. They’re the smokestack old-economy firms. Metal benders in Industrials, basic industrial metals in Materials, maybe a coal-based utility for good measure. I think we’ll see evidence of that point approaching — irrevocably — soon.
We cannot stop the march of economic progress; we can only lose sight of its progress. I think in the fragile-recovery framework we’ve witnessed over the past few years, many investors have stayed very close to their former courses.
Bottom line: Our Weiss Ratings are telling us to go beyond the most conservative sectors and spread our wings for better diversification and profit opportunities.
Best,
Don Lucek
