The second quarter ends this week. Next week I will review the yearly performance of the sector. We are not yet down, but the sector is performing as we would expect as we enter recession.
For a summary of the business cycle approach to investing, see my last article Conditioning your portfolio for higher interest rates,
The top sectors this year were those that have generally performed best during recessions: Utilities, Health Care, Consumer Staples and Energy. The latter has been a top performer historically, heading for a recession.
The worst performers year-over-year were consumer discretionary, technology and communication services. These are sectors that tend to underperform when the economy goes into recession.
Markets are always looking ahead. It may be early days but once we start looking beyond the downtrend and towards a correction it will give us an idea of which areas might have the best value right now.
There are several sectors that have historically performed well in the post-recession recovery. The sectors that consistently outperformed during this period were Real Estate, Consumer Discretionary and Industrials.
By looking at which sectors are performing poorly in the later stages of the downturn in the economy, which tend to do best in the recovery phase, we can get an idea of where to bottom fish. can think.
There is no sector that tends to go into recession before the worst of the latter part of the economic cycle. But two sectors are in the worst position to transition into a recovery from recession. They are real estate and industry.
However, the industrials sector has outperformed the S&P 500 year after year, and the real estate sector has outperformed the S&P 500. So they don’t appear to be areas ripe for bottom fishing.
But if we broaden our search a bit, one region seems like a good candidate for looking for value, especially if we have a long time horizon. The consumer discretionary sector is consistently the worst performer in the late stages of the economy (which is technically where we are), has erratic performance in recessions, and then consistently outperforms the market in the recovery phase.
This is a reflection of the energy field, which performs better late, is fickle during the recession, and then consistently underperforms during the recovery.
a long-term strategy
Therefore, based on the historical performance of the markets, a good long-term strategy would be to shift some of these energy gains into the consumer discretionary sector. The energy sector is up 41% year-on-year and consumer discretionary is the laggard, down 28%.
You can get a lot more bang for your buck in the consumer discretionary sector than you could six months ago, especially if you take money out of the energy sector to do so.
What are some of the top-rated companies in the consumer discretionary sector? Fidelity currently ranks 114 out of 815 companies in the industry as either bullish or very bullish. These companies include mega-cap household names like Ford Motor Company (NYSE:F), Lowe’s company (NYSE:LO) and money tree (NSDQ: DLTR) and retailers prefer messis (NYSE:M) and special services such as H&R block (NYSE:HRB).
Note that this should not be construed as an endorsement by any of these companies. There may be one or more factors that could exclude you from consideration for your own portfolio, so you should always do your due diligence.
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