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Defensive industries such as consumer staples, health care and telecom, which tend to do well regardless of the economy’s health, led the stock market’s rally at the beginning of 2013. But many investors were surprised that economically sensitive sectors including industrials and consumer discretionary didn’t take over.
Anomalies like that can last longer than you might expect. In fact, defensives never went out of style, and a durable rally (many industries rising at once) didn’t materialize. One of the more important economically sensitive sectors, technology, was not well-represented, and early cycle cyclicals like materials saw hit-or-miss performance.
So it has been an impressive rally, to be sure. But we still have not seen a clear handoff from the defensive sectors as global economic growth has sputtered. And concerns over the effects of the removal of monetary stimulus (the fear of a Fed tapering of bond purchases) have held back enthusiasm for more aggressive companies.
I think that’s about to change.
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| The technology sector is poised to rebound in 2014. |
In monitoring the financial performance of stocks across all sectors, I’ve detected a bottoming of negative growth in tech, and I think as we move through 2014 we’ll receive more evidence that global economic growth is regaining its footing. In particular, concerns over growth in China (and Asia in general) and Europe will abate as rebounds in those regions reassure investors that they don’t need to hide in the defensives any longer.
We’re pulling into the end of the calendar year, and that means it’s time to rebalance portfolios and reposition into the best bets for go-forward performance. Some of the recent performers like industrials will continue to be favored, and for three months or so we’ll see strength in health care (a traditionally defensive sector that is being buoyed more by emotional trading linked to the future of Obamacare).
But by the time we reach first-quarter earnings season (April), it’ll be clear that the clouds of uncertainty are lifting. To prepare for this, I want to increase exposure to cyclical sectors like materials, financials and industrials, while reducing exposure to very defensive sectors such as utilities and telecom. At some point during the year, we’ll see health care fade. Health care, as I pointed out last week, will likely be the trickiest of all in terms of picking stocks.
I think stocks in general have gotten a bit ahead of the fundamentals that support them, and are due for a pullback — 10 percent at the most. So in the event of a decline, there may be a brief flight to the safety of defensive stocks.
That could be a great chance to take profits in the winners of 2013 and to build positions for rebounds in relative laggards like technology — my favored sector for 2014 — and energy.
Best wishes,
Don
