Look to these stock market sectors in 2019 instead of FAANGs and tech

Put money into utilities, big pharma, consumers and gold.

  • By Jeff Reeves,
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Investors have had to digest a lot in the past 12 months. While 2017 saw continued bull-market exuberance, the emotional trend of 2018 seems to be one of trepidation about more challenging times ahead.

The S&P 500 (.SPX) is in danger of logging its first negative year since 2008 (by my measure 2011 and 2015 are slightly positive based on Jan. 1 to Dec. 31). But even worse for many investors is that the tech sector, once a reliable profit center for outperformance and a favorite of many traders, has rolled over. Onetime tech darlings including Facebook Inc. (FB) and Apple Inc. (AAPL) have underperformed in a big way lately; iShares U.S. Technology ETF (IYW) is down 13% since Oct. 1.

There are few signs that the tech sector sell-off is easing. Reports indicate that global smartphone sales have peaked and are steadily declining, acting as a headwind to all manner of related companies, and a general "risk-off" mentality has investors more reluctant than ever to chase overvalued small-caps operating in the red and relying heavily on narrative instead of tangible results.

To get ahead in 2019, you may want to consider a new strategy than simply chasing the FAANGs. Here are a few options if you're rebalancing your portfolio now:

Utilities

Sure, utilities are boring. They also are about as low risk as stocks can be.

U.S. utilities are effectively regional monopolies thanks to regulatory burdens and the incredibly costly proposition of anyone starting a new power company from the ground up. Moreover, utility stocks have not just held their own lately but have outperformed the market at large. Since Oct. 1, the Utilities Select SPDR Fund (XLU) is up about 8%, vs. a 10% decline for the S&P 500 in the same period and an even sharper decline for Apple and Facebook shares.

Looking forward, there are reasons to expect this run for utilities to continue. After sluggish performance for much of 2018, valuations in the sector remain reasonably attractive, even after its fourth-quarter run. Plus, utility stocks are typically generous with dividends that help sweeten the pot for investors.

The XLU ETF is a good diversified way to tap into the space, but leading utility stocks NextEra Energy (NEE) and Exeleon (EXC) are both worth a look after returns of nearly 20% year-to-date in 2018.

Big pharma

As a recent Barron's article observed, "The case for health care is simple. It is an all-weather sector that somehow manages to avoid almost all of the threats that are currently ravaging the broader stock market." Indeed, healthcare is not tied to cyclical economic trends, with patients spending on drugs and doctor's office visits regardless of inflation or the unemployment rate.

Yet not every segment of the sector is created equally. Smaller development stage biotech stocks can be incredibly volatile, and while that may mean rapid gains in a "risk-on" environment, it also means a race to the bottom when investors lose their nerve. Case in point: The SPDR S&P Biotech ETF (XBI) is down about 17% since Oct. 1.

Contrast that with Big Pharma stocks. The largest drugmakers on the planet may not have high-octane potential, since new products basically just replace the decaying revenue from patent expirations, but they certainly have scale and stability.

As with utility stocks, profits are not elusive and dividends are not all Big Pharma has to offer. Merck & Co. (MRK) and Pfizer Inc. (PFE) both are up slightly since Oct. 1 despite a hostile investing environment, showing their ability to offer share appreciation as well as portfolio stability.

Consumer discretionary

While there are hints of investor uncertainty, U.S. consumer confidence remains rock solid. So it would be a mistake to abandon consumer-focused stocks — particularly in specialty retail.

The Conference Board estimates that while there was a small rollback in November, consumer confidence is near an 18-year high. Mirroring that is spending data for October that was recently released by the Federal Reserve, showing continued strength in hard spending. And while a recent Gallup poll on holiday spending shows that some families have reduced their projected budget, the typical family expense will increase "modestly" this year and an actual year-over-year decline is "highly unlikely.”

From an investment perspective, these strong consumer metrics are most evident in a host of retail and consumer companies. First there's Victoria's Secret parent L Brands (LB), which had fallen on hard times but is up modestly this year so far, and showing signs of a turnaround even as the broader stock market has struggled. There's also Autozone Inc. (AZO) which has gained an impressive 13% since Oct.1 due to a massive earnings beat. TripAdvisor Inc. (TRIP) has gained about 20% since Oct. 1 to maintain its status as one of S&P 500’s top performers to date in 2018.

With strong momentum lately, even as other stocks have faded, consumer names are worth a look in 2019 both as a profit center and as a way to take shelter from volatility in other sectors.

Gold

Speaking of places to take shelter, gold’s (GCZ8) safe-haven reputation of gold has returned. Both physical gold, as represented by exchange-traded funds such as SPDR Gold Trust (GLD) or large-cap gold mining stocks tend to do better in times of trouble.

Case in point: GLD is up about 5% since Oct. 1 on rising gold prices, and miners AngloGold Ashanti (AU) and Barrick Gold (ABX), for example, are each up about 20% in the same period.

Adding to gold's glitter right now are continued concerns of inflation. In fact, Goldman Sachs analysts just wrote, "At this stage of the business cycle, gold may be particularly appealing as a portfolio diversifier given that long-term bonds, traditional safe-haven assets, may be hurt if US inflation surprises to the upside." Since gold prices are denominated in U.S. dollars, prices of this commodity naturally rise as broader inflation pressure push up input costs across the board.

Having a diversified portfolio is always a good idea, and that's particularly true at times like now where market leadership is uncertain. While there are many strong growth metrics and reasons for optimism, it's naïve to ignore structural problems like inflation or Brexit or global trade wars. So whether you're looking to ride the recent momentum or simply put on a hedge, both physical gold and related equity plays are worth a look.

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