Sector Investing: What’s Hot and What’s Not

Each day I receive a number of alerts that inform me of happenings in the markets. I am notified about news in companies I track, of important industry trends, and which stocks are hitting new 52-week highs and lows.

The latter category is important, because it highlights which sectors are doing well and which aren’t. Last week I received an alert that was particularly surprising for me, because it shows the breadth of current market trends.

Before sharing that data point, I should note that the bond market hit another dubious landmark last week. The 30-year Treasury bond sank to an all-time low. This also resulted in the yield of the 30-year Treasury bond falling below that of stocks for the first time since 2009 (the only other time in the past 40 years this event has transpired).

This puts investors in a tough spot. The stock market is becoming increasingly volatile. Safe spaces like bonds are offering historically low yields. Higher yields in the stock market correspond with greater risk.

So, what are investors doing? An alert I received last week tells the tale. Investors are selectively chasing yield, as evidenced by the new highs and lows in the various sectors.

The alert divided the S&P 500 into 12 sectors. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, Technology, and Utilities.

The following table clearly illustrates where investors are placing their bets.

Source: FactSet alert on August 27, 2019

As the table shows, the Utilities and Real Estate sectors are hot. This is primarily because they offer the best combination of yield at the lowest risk. The percentage of new highs for both sectors relative to the total number of 52-week records (low and high) is 95% for both sectors. The only other sector to cross the 50% mark was Materials.

At the bottom of the heap was Energy, Communication Services, and Technology. But the breadth of the bear market in the energy sector is clear from the sheer number of new lows. The latest leg down for the energy sector is a result of a plunge in oil prices brought on by the latest threats of tariffs in the ongoing trade war with China.

Those invested in Utilities and Real Estate are riding high, but those sectors won’t stay on top forever. All of these sectors are cyclical. A contrarian with a bit of patience may be wise to start accumulating some of the out-of-favor sectors.

If I were dollar-cost averaging into the market, I would start directing money into those sectors at the bottom of the heap. They will eventually return to the top, and you will have bought in at bargain prices.

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