Last time he told you to not sweat another stock market panic attack.
This time, he’s got the three sectors to favour in this new market environment.
He being Dr. Ed Yardeni, President of Yardeni Research. Yardeni had favourite sectors in the late 1990s and the bull market of the 2000s.
Now, with the expectation of rising interest rates, and slowing profit and economic growth, Yardeni has isolated three sectors investors should look at to find the types of stocks that can thrive.
During the late 1990s, we favoured overweighting the S&P 500 TMT sectors—Telecom, Media, and Technology.
During the bull market of the 2000s, we recommended overweighting MEI—Materials, Energy, and Industrials.
This year, we are keen on EFT—Energy, Financials, and Technology.
(1) Energy. Climate activists have succeeded in forcing fossil fuel producers in the US and Europe to slash their capital spending on finding and extracting oil and gas.
US frackers have yet to boost their production in response to surging oil prices, suggesting that they can’t—simply because their wells are increasingly less productive because they are running dry.
A February 3 WSJ article titled “Oil Frackers Brace for End of the U.S. Shale Boom” concluded:
“The era in which U.S. shale companies could quickly flood the world with oil is receding, and that market power is shifting back to other producers, many overseas.”
Spare capacity now is largely confined to countries that are vulnerable to geopolitical turmoil.
Unnerving the oil market so far this year were a drone strike in Abu Dhabi and tensions between Russia and the West over Ukraine.
The S&P 500 Energy sector has been the worst performing one of the S&P 500’s 11 sectors since the start of the current bull market during March 2009.
It was the best performer during January, with a gain of 19.0%.
That’s because the price of a barrel of Brent crude rose $11.27 during the month, following a rise of $8.64 from its recent low during December 1 through the end of 2021.
The sector’s companies reported better-than-expected earnings and cash flow during Q4-2021 thanks to higher revenues and lower costs.
The ratio of the S&P 500 Energy stock price index to the S&P 500 stock price index fell to a record low during 2020 (Fig. 13). It remains well below its average since 1970.
(2) Financials. The S&P 500 Financials share of the market cap of the S&P 500 rose from 10.7% at the end of last year to 11.3% at the beginning of February.
This series has been highly correlated with the 10-year Treasury bond yield, which should continue to rise this year. Loan demand is starting to rise for the commercial banks.
M&A activity hit a record high last year and is likely to hit another record high this year.
The ratio of S&P 500 Financials to the S&P 500 has yet to recover from its crash during the Great Financial Crisis (Fig. 15).
It did make a new low during 2020 and has recovered a bit since then.
(3) Technology. The ratio of the S&P 500 Information Technology sector to the S&P 500 has rebounded in recent years back to its record high in 1999 (Fig. 16).
Much of the surge in that ratio is attributable to three of the MegaCap-8 stocks that are in the sector, namely Apple, Microsoft, and Nvidia.
Nevertheless, we continue to recommend overweighting the sector, which should benefit from a capital-spending boom to boost productivity in the face of chronic labor shortages.
During Q4-2021, technology accounted for a record 52.0% of current-dollar capital spending (Fig. 17).
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