The bull market in U.S. stocks that began in March 2009 continues to march higher, supported by low interest rates, low inflation and a moderate growth environment.
However, the market is much more than just the quote you hear on the news about the Dow Jones industrial average or the Standard & Poor's 500 index. These broad market averages often hide a lot of action within the market.
The S&P 500 shows a moderate 4.1 percent gain through Sept. 9, but digging deeper into specific stock sectors there are dramatic double-digit gains. For example, the energy sector has posted a 14.1 percent gain, telecommunication services are up 12.7 percent and utilities are posting an 11.1 gain, according to S&P Global Market Intelligence data.
Investors can use a rotational strategy to shift assets into stock sectors that are benefiting from the current phase of the business and economic cycle.
The winners. Yield-starved investors have flocked to utilities and telecommunications for their dividends. Their attractiveness has grown as traditional income-producing vehicles, such as bonds and CDs, have little or no yield, says Jim Davis, regional investment manager at U.S. Bank's private client group in Springfield, Illinois.
"Approximately 30 percent of the bonds outstanding on a global basis currently have interest rates below zero percent. Here in the United States, the 10-year U.S. Treasury note has hovered near 1.60 percent," Davis says. "By contrast, the dividend yields provided by the utilities and telecommunications sectors about 3.6 percent and 4.6 percent, respectively, appear very attractive."
Energy stocks scored a big comeback in 2016 after crude oil prices fell to around $26 per barrel from more than $100 per barrel in August 2013.
"The energy sector's performance is due to low valuations and the increase in the price of oil through the beginning of June," says John Conlon, chief equity strategist at People's United Wealth Management in Bridgeport, Connecticut. "Although oil prices came down from June to August, they have recovered somewhat and are still higher than the start of the year."
The laggards. There are also definite laggards and even a losing sector in the current environment. For example, the consumer discretionary sector is unchanged, while financials are posting a 0.5 percent gain and health care is down 1.1 percent through Sept. 9.
The consumer discretionary sector includes a broad array of companies, such as retail, movies, restaurants, home furnishing and hotels, and performance in this sector has been a mixed bag.
"While the consumer has shouldered the burden during the economic expansion, not all consumer discretionary industries have benefited," Davis says. "Consumers have altered their behaviors and habits in recent years. They have preferred to spend dollars on experiences rather than goods. Internet retailers have performed better than multiline retailers as consumers have shunned malls in favor of online shopping."
Financial stocks, including banks, have suffered in 2016 due to "head fakes" in regard to the Federal Reserve raising rates, Conlon says.
At the start of the year, analysts widely expected the Fed to increase interest rates three or four times in 2016, but it has not pulled the trigger even once. While the Fed meets this week to consider a rate hike, most analysts believe recent economic data will prompt officials to sideline a rate change until December.
The health care sector has suffered due to the negative headlines regarding price increases for certain drugs and political rhetoric regarding price controls, Conlon says.
Here are five money moves investors can consider.
Think strategically. The S&P 500 is trading near all-time highs. While it can be unnerving to buy stocks as the market is falling or during a correction phase, smart investors look to buy low.
"Use dips as buying opportunities," says Jimmy Lee, CEO of the Wealth Consulting Group in Las Vegas. "Don't chase returns and be patient."
Look for companies with revenue growth. "In this slow-growth, low-inflation and subdued interest rate environment, we think sectors and companies that can grow revenues and earnings faster than the overall market and their competitors are attractive," Davis says. "An extra benefit would be stocks that pay dividends and have the potential to raise their dividends in the future."
Davis says he is considering companies in the technology, health care and consumer discretionary sectors.
"Likewise, we favor companies that have niches and/or investment themes in cloud computing, e-commerce, connectivity, the global consumer and an aging population," he says.
Add exposure to energy stocks. "The expectation is that the energy sector will continue to outperform as oil prices climb higher as production and inventories draw closer to demand," Conlon says.
His favorite companies now: EOG Resources (EOG), Occidental Petroleum Corp. (OXY), Phillips 66 (PSX), and Schlumberger Limited (SLB).
Financials could benefit if the Fed hikes rates. Conlon's top picks: JP Morgan Chase & Co. (JPM), Citigroup (C) and Bank of America Corp. (BAC).
Increase allocation to tech sector. Technology is another sector that should also outperform with the growth in cloud computing, cybersecurity and the state-of-the-art work being done in areas like as driverless cars, Conlon says. His top picks within technology include Alphabet (GOOG, GOOGL) and Facebook (FB).
Looking ahead, Conlon remains upbeat on the prospects for this bull market.
"I believe the bull market will continue through 2016 and 2017 albeit at a slower rate than investors have grown use to over the past few years," he says. "I believe returns on the order of 5 percent to 7 percent, including dividends, will be more the norm. Continued economic growth, recovering earnings, and low interest rates will be the factors driving equities."
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