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It’s a trap: 3 sectors to avoid right now

Investors generally expect interest rates to rise in the coming 12 months. In view of a rising rate environment, what sectors should you be out of? As Sam Stovall, chief equity strategist at S&P Capital IQ, explains in the attached video, historically the three sectors with the worst average performance have been financials, telecom and utilities.

He says when it comes to telecoms and utilities, “Investors have been gravitating here because of the attractiveness of the high-dividend yield but I think they should be cautious at this point,” as bond prices will eventually fall.

With the stock market price/earnings ratio right now around 16, Stovall finds all three sectors expensive. Financials are trading at an 18% premium relative to the S&P 500 (^GSPC). He says “We believe the financials are more than discounting a recovery in the U.S economy and from a technical perspective, looking at a 12-month relative strength, the group appears to be rolling over.”

Utilities had a bounce last week but S&P Capital IQ’s long-term view is bearish on the sector. Stovall says utilities are going through a counter trend rally. “Here’s a group that is trading at more than 3 times its projected 5-year growth rate versus 1.4 for the S&P 500. It’s expected to show earnings growth that is less than half than what is seen on the S&P. “

On the flipside, Stovall says the sectors he likes right now are Energy, Health Care, Industrial and I.T.

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