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Sector stars: mid-year report

Find out which sectors got off to the best start, and some ideas for the rest of the year.

  • Fidelity Active Trader News
  • – 06/24/2013
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Despite the sharp decline toward the end of last week, it’s been an exceptional first half of the year for the U.S. market. As of June 24, the S&P 500® Index is up over 11%—and more than 12% on a total return basis—during 2013, with stocks having hit new all-time highs. Additionally, domestic inflation remains below the Federal Reserve’s target of 2%, and the economy is adding jobs, although much progress still needs to be made on this front.

Here, we look at which sectors have outperformed during the bull market rally, and a few potential areas of opportunity for the second half of 2013.

Consumer discretionary takes the lead again

Momentum has persisted for several sectors. After an outstanding 2012, consumer discretionary, financials, and health care are once again the top-performing sectors through the first half of the year (see the chart below). Over the past full year, dating back to June 2012, financials are the top-performing sector, up 32%, while the consumer discretionary sector led the pack over a five-year time frame, having soared a staggering 79%.

Like last year, utilities, materials, and technology continue to lag behind the rest of the market. Nevertheless, all sectors have been solidly in the green so far this year. Moreover, two of the leading laggards, utilities and telecom, have offered the highest yields among stocks. The values in the chart above reflect price returns, so the income component generated by these sectors has partially offset some of their underperformance.

Second half sector performance outlook

Stocks were trading close to all-time highs set earlier this year before the recent selloff. Yet a number of risks threaten to prevent the market from going any higher. Among them: The Federal Reserve and other central banks potentially tapering down existing easy money policies, lingering debt troubles in Europe, and the possibility that interest rates could move higher.

Several positive dynamics may suggest the market’s forward rally could continue. Fidelity’s asset allocation research team has focused on three segments of the U.S. economy that have the potential of sustaining the momentum for stocks. They are the:

  • Ongoing U.S. housing recovery. Dirk Hofschire, CFA®, senior vice president of asset allocation research, believes that the housing market “is now in a full-blown recovery” as credit conditions have eased a bit. This may be one reason why the consumer discretionary sector, which contains many industries sensitive to the housing market, has performed so well over the past year, and select industries within the sector might remain a bright spot if the recovery persists.
  • U.S. energy renaissance. According to the International Energy Agency, the United States will supplant Saudi Arabia and Russia as the world’s largest energy producer by 2017 (see the chart below). Larry Rakers, portfolio manager of the Fidelity® Dividend Growth Fund (FDGFX), thinks investors might want to explore the unfolding U.S. energy boom with pipeline operators, oil and gas producers, select refiners, and exploration and production companies that have access to the most productive regions where oil reserves have been found.
  • U.S. manufacturing revival. A number of factors are contributing to the revival in U.S. manufacturing. Restrained labor costs, wage increases in certain emerging markets, and cheaper energy input costs have created a positive environment for the U.S. manufacturing segment. “Even though manufacturing activity has slowed a bit in recent months,” Hofschire points out, “the corporate sector remains healthy and increasingly inclined to raise capital spending.”

Consequently, sectors exposed to housing, energy, and manufacturing might offer opportunities, and could be buffered somewhat against any potential market downturn, over the intermediate term.

Looking ahead

The domestic energy revolution taking place in the U.S., in particular, could have significant implications for a number of industries. Low relative gas prices might make the U.S. a more cost-competitive manufacturing location for industries that require significant usage of resources like chemicals, steel, paper, and mining. Additionally, relatively cheaper energy prices could help consumers and might pad profit margins across a range of businesses.

Even though the market has been pulling back after a strong rally through most of 2013, a case can still be made to be long stocks. However, the dramatic difference in performance among the various sectors thus far this year may imply that traders may want to be selective in their exposures. It might be prudent to weigh the relative performance of these sectors, and consider the areas of strength in the economy—specifically housing, energy, and manufacturing-related industries—when deciding what trades to make.

Learn more

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Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk.
Because of their narrow focus, investments in one sector tend to be more volatile than investments that diversify across many sectors and companies.
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