Sector Summaries 2017.03.20

Looking forward into the markets by sector

It has been several years since we have considered the totality of the market by sectors; we last did this in our January 2012 article to be precise.  Within the past five year, we’ve elected a government dominated by a single political party, seen several all time market highs, and experienced disruptive technological advancements.  Given the changes of the past few years, it is time to revisit the market and recognize those broad themes which impact its underlying sectors. 

The scope of this article is a little different than previous efforts.  For example, in previous publications, such as our December 2014 on the Energy Sector or our December 2012 examination of the Housing market, we’ve had the time to more thoroughly examine these individual sectors.  In lieu of providing that level of analysis on each of the traditional ten sectors - which would strain our readers’ attention spans as much as our content production capacity - we thought to try a different format for this article:  bullet points by key industries.  Our goal is to identify and summarize the trends you can expect to continue throughout the near future.  Here are our expectations.

Energy

  • Solar power has reached cost parity with traditional non-renewable energy within several key markets, in the US and abroad.  (This depends on your region and storage solution.)
  • The US is again an energy supply giant, with the potential to store and even export huge reserves of natural gas and oil due to horizontal drilling and hydrofracking.  Price ranges near $150 per barrel of oil are gone; prices aren’t likely to exceed $80 for the foreseeable future.
  • Regulations may have accelerated the decline of non-renewable energy sources, particularly coal, but economics are the primary factor now.  Easing these regulations may slow down the trend, but coal power generation is getting more relatively expensive as technological advances and economies of scale push solar costs down further.

Industrial

  • The sub-industries within the materials and industrials sectors are strongly correlated to global infrastructure investment, trade, and economic expansion.
  • The new administration has clearly made increased defense spending a priority, which should directly benefit this sector.

Materials

  • The current global macro-economic environment is healthy and on a positive trend.  Large national infrastructure projects, already active in China and potentially within the United States, could boost this sector even more.
  • However, this is potentially volatile.  Populist policies could easily strike expectations and limit requirements for raw-materials for construction, refining, trade, and transportation.

Financials

  • The financials industry should have some significant tailwinds including:
  • Lower regulations for banks and other financial institutions
  • A deficit in new housing after the 2008 crash, solidifying price floors, and
  • A rise in interest rates which increases margin potential for lending

     

Consumer Staples and Consumer Discretionary
  • Traditionally, one of the most defensive sectors, consumer staples tend not to change their fundamentals with the business cycle as consumer’s buying patterns on food and household products remain fairly constant. 
  • On the other hand, positive holiday shopping numbers in the consumer discretionary sector, particularly retail, masks some potential long term weakness.  Traditional brick-and-mortar business models are being upended as value-conscious and time-strained consumers utilize lower margin online-shopping instead.

Healthcare

  • Clarity is most difficult to achieve on this sector relative to others given the current political debate on how to reshape insurance and health care providers.
  • Biotechnology remains the high-risk, high reward industry with potential advances in personalized therapies, and pharmaceuticals tailored to individuals or small groups.

Information Technology

  • Advances in robotics and machine learning have become a huge disruptive force for blue collar jobs in manufacturing, driving, retail sales, and customer service. 
  • Technology has always attacked the bottom of the skill tree first.  More interesting, advances in AI have already started to augment, eliminate, or replace traditionally safer white-collar jobs like doctors, lawyers, and consultants. 

Utilities and Telecommunications

  • These sectors tend to be highly regulated and resistant to changes in the business cycle, particular as internet connectivity is being progressively considered a right rather than a luxury. 
  • These sectors also tend to pay large amounts of dividend income, which was attractive to potential bond owners, given the low interest rate environment.  Thus, the projected continued increase in interest rates could limit the attraction of these sectors as bond yields improve.
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