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Beyond Benchmarks: A Fresh Survey of Stock Sectors

April 17, 2017
sector investing
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As the old saying goes–there is always a bull market somewhere. Many investors consider the "market" to be the major benchmark indexes like the Dow Jones Industrial Average ($DJI) or the S&P 500 ($SPX), as daily changes are broadcast by major news organizations. However, the indexes are only one snapshot picture of what might really be happening. Investors who only focus on the broad market might risk missing opportunity within the market.

Sectors: It’s What’s Inside that Counts?

The S&P 500 is divided into 11 different sectors such as Consumer Discretionary, Energy, Financials, Health Care and more. Each sector has its own unique set of fundamentals that can drive the sector higher and lower. And since they don't always move in tandem, sector investors have the potential to capitalize on intra-sector trends.

Here’s a look at the S&P 500 sectors through the first quarter of 2017.      

Investors could benefit from understanding the direction and influence of sector specific fundamentals on a stock investment. "Even if you choose a good company, if a lot of the stocks are falling within that sector – it may just be that the sector is being sold overall," says JJ Kinahan, chief market strategist at TD Ameritrade. Take the time to understand the macro influences that could impact the overall sector you are investing in.

First Quarter Leaders

Information Technology and Health Care were standout winners in the first quarter. Kinahan notes that the technology sector stands to benefit from proposed corporate tax changes by the Trump Administration. The proposal includes incentives for U.S. multinational companies to repatriate the estimated $2 trillion-plus in cash currently being held abroad. Many of the larger technology companies that hold significant chunks of foreign earnings overseas could repatriate and bring back earnings at a much lower tax rate.

The Health Care sector has been rebounding in 2017 following its weak performance in 2016 due to regulatory concerns, Kinahan says.  In 2016, the sector posted a 4.4% decline.

Last year's sell-off in health care stocks has depressed price/earnings valuations in that sector, says Sam Stovall, chief investment strategist at CFRA. "The health care sector has below market P/E valuations at 16.3," Stovall says. Looking ahead, "this sector looks good for a variety of reasons," he adds. "In 2015 you had more new entities approved by the FDA than in the past 20 years. These are items that could become blockbuster drugs. The future looks bright in terms of possible blockbuster drugs," Stovall says.

Notable Laggard: Energy

The energy sector weighed in as the biggest underperformer in the first quarter and continues to see challenges ahead. "We have an underweight recommendation on Energy. Crude inventories are at record levels and continue to rise, which will put downward pressure on oil prices. There is an expanding number of rigs being put to work, which will put additional pressure on prices," Stovall says. "We are skeptical that production cuts by OPEC and Russia will be honored," he adds.

On The Radar Screen?

Kinahan points to the Financial sector as one for investors to keep their eye on throughout the remainder of 2017. "The fact that the Fed is expected to raise rates a couple of times this year means financial stocks could do well in this environment," Kinahan says. He also points to the Consumer Discretionary sector as an area that could benefit if the economy continues to improve, which could mean more spending at restaurants and for entertainment, Kinahan says. 

Sift Through Sector Candidates

Use Stock Screener to narrow selections based on sectors like technology, health care and more. Log in to your account at > Research & Ideas > Screeners > Stocks.

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