Who is leading and who is lagging in this market might surprise you, writes Mike Larson.
Who’s leading, and who’s lagging, in this market? The answers might surprise you for a very simple reason: Way too much attention is being paid to the losers, while way too little attention is being paid to the winners.
That’s terrible for investors like you. Not only is your attention constantly being diverted by “squirrel stories” that don’t truly matter for markets in the long term, you’re also being steered toward bad investments for this stage in the economic and credit cycles, and away from good ones.
I’m going to do my best to fight that – and get you on the right track. Here is the evidence that proves my case.
There are 11 sectors in the S&P 500 and an equal number of benchmark exchange traded funds (ETFs) that track them. The relevant sectors and ETF ticker symbols are: Energy (XLE), Materials (XLB), Industrials (XLI), Consumer Discretionary (XLY), Consumer Staples (XLP), Healthcare (XLV), Financials (XLF), IT/Technology (XLK), Communication Services (XLC), Utilities (XLU) and Real Estate (XLRE).
Of the entire bunch, only two made new highs in the recent rally; XLRE and XLU.
Meanwhile, XLE, XLF and XLB remain far below their highs (set a whopping 13 months ago in the case of the latter two).
The oft-talked-about tech ETF, XLK, is still trading around 7% below its high, and XLI is about 6% below its peak.
And that’s not even the half of it. Look at the table below. It shows the one-year total returns for all 11 S&P 500 sector ETFs. I color-coded the returns column for ease of reference and sorted it from best to worst.
What should jump right out at you? Defensive, higher-yielding, recession-resistant, income-focused ETFs are killing it!
They might not have anything to do with modern monetary theory, U.S.-China trade negotiations, whiz-bang technologies like artificial intelligence and the internet of things or any of the other buzzwords the financial press can’t keep talking about, but they have the far more important benefit of making you the most money.
The moral to this story? Aggressive investing worked best for several years leading up to February 2018. But it has not worked best since.
Instead, “safe money” stocks and sectors have taken the lead. Their returns are more than double, triple or even greater than the sectors that get all the attention.
How can you change your investing strategy to take advantage of this? Focus on the winning investment sectors and stocks. Leave the laggards and the riff-raff to someone else.
One last thing: This sector performance breakdown practically screams slowdown/recession dead-ahead! It confirms the message the bond market has been sending out for several quarters now. So, in addition to re-allocating toward defensive investments, I recommend you continue to carry higher levels of cash in your portfolio.
If I’m right, we haven’t seen the worst of the market turmoil yet. Much more is coming down the pike in 2019 and beyond.
