With the first half of 2015 nearly in the books, now is a good time to take a look at which stock sectors have performed best so far this year — and more importantly, which ones might be best positioned for a strong run in the second half of the year.
The Fidelity Quarterly Sector Update provides a current overview of how well ten different major stock market sectors are performing at any given time: consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, telecommunication services, and utilities. The Update measures the relative attractiveness of each of these sectors in relation to the following five factors:
- The business cycle
- Relative valuations
- Relative strength
The most recent Fidelity Quarterly Sector Update reports that the information technology sector is best positioned for the remainder of this year. IT is followed closely by the health care and consumer discretionary sectors, which have been the top two performing sectors thus far this year.
Information technology “reflects positive signals on most metrics but appears neutral on six-month relative strength,” stated the most recent Update. It adds: “Health care demonstrates generally positive signs, although the sector … appears expensive on relative valuation metrics. Consumer discretionary also performed well this year, and shows positive short-term signals.”
One reason for the Update’s bullish outlook on IT is the fact that the U.S. economy is in a mid-cycle expansion, and the IT sector (along with industrials) has historically performed well during this economic stage. Consumer discretionary is benefitting disproportionately from low oil prices and a strong dollar, notes the Update, not to mention strength in the retail industry, as the employment picture improves and consumers spend some of their gasoline savings on discretionary items like clothing and electronics.
Meanwhile, health care (along with IT) demonstrates the strongest fundamentals among the ten sectors, especially with regard to earnings growth and free cash flow margin. A number of factors have contributed to the strong performance and outlook for health care, where earnings are up 18% over the past year. These include robust innovation (especially in biotechnology), the aging population and a growing middle class in many developing nations.
From a valuation standpoint, IT, financials and telecommunications are all relatively inexpensive. Conversely, energy is relatively expensive based on forward earnings expectations or free cash flow due to low oil prices, while health care valuations are “somewhat stretched,” states the Update.
Health care is the leading sector with regard to momentum, followed by IT and consumer discretionary. On the flip side, the energy, telecom and materials sectors are the three biggest laggards in terms of momentum. Consumer discretionary is the top sector when gauged by relative strength, followed by health care, IT and consumer staples. Low oil prices put energy at the bottom of this measurement.
In addition, the Update notes that certain sectors are more heavily influenced by rising interest rates, including utilities and telecommunications. Such high-dividend-yielding sectors tend to underperform at the start of a Federal Reserve tightening cycle, which we are entering now. However, they typically start to outperform in the later stages of a tightening cycle.
Given the results of the most recent Fidelity Quarterly Sector Update, you might want to emphasize the IT, health care and consumer discretionary sectors as you plan your investing strategies for the second half of 2015. Here are a few investments within these sectors to consider:
- T. Rowe Price Global Technology Fund (PRGTX) — This tech fund also provides international diversification by investing assets in no fewer than five countries and investing 25% of its assets outside of the U.S. It has achieved annual returns of 22.3%, 25.8% and 19.1% over the last one, three and five years.
- Fidelity® Select Health Care Portfolio (FSPHX) — This health care fund was first established in 1981, which makes it the oldest health sector mutual fund still available to investors. Its returns have topped those of the average health sector fund in nine of the past ten years.
- Rydex S&P Equal Weight Consumer Discretionary ETF (RCD) — This ETF seeks to track the performance of the S&P Equal Weight Index Consumer Discretionary. Since all holdings are equally weighted, the ETF tends to be less volatile and risky than many other funds.
Of course, no one has a crystal ball to be able to predict exactly which stock market sectors and individual stocks will outperform in the months to come. Nevertheless, the data contained in the Fidelity Quarterly Sector Update provides a good indication of which stock market sectors may be the best performers in the future, which could make it a useful tool as you formulate your investing strategies for the rest of this year.