Markets opened the year on a sharp down note but rallied strongly from February 11 onward (at least until the Brexit decision arrived). With half the year behind us, we look at how sectors have performed so far and consider what we should expect in the back half.
With slower growth rates globally and uncertainty growing in the wake of Britain’s vote to leave the EU, the U.S. economy in Q2 saw slow to moderate growth of around 1.2%.
Weak job growth in May seemed like a setback, but a strong comeback in June with 287K additional jobs helped rebuild confidence in the stock market, fuelling a nice rally in July (According to the Fed’s June 2016 Job Report). Sectors such as Healthcare, Materials and Information Technology emerged as new leaders, while a non-cyclical sector like Consumer Staples, which has historically performed better in down markets, had a relatively bad run in Q2.
The Materials sector was one of the biggest positives of Q2. A pull for service business spending on cap-ex helped the sector emerge as ‘Attractive’ in the Zacks Investment Research ranking. The best among the pack were Metals-non-Ferrous and Steel Industries with a ranking of 2.03 and 2.55, respectively, while Building Products/Construction Materialsat also looks quite encouraging at 2.70.
Another sector that looks very attractive and is expected to remain so in the coming quarters is Healthcare, driven by sub-sectors like Medical Care and Drug companies. A nice blend of growth, innovation and defensive corporate strategies has made the sector attractive. With persistent innovation in different areas of medical care such as oncology and immunology, among others, long-term growth prospects also look promising. Zacks Investment Research ranked it as attractive at 2.68.
Electronics and the hot semiconductor industries helped the Info Tech sector pass Q2 with flying colors and emerge as a ‘Very Attractive’ sector in the Zacks Investment Research ranking at 2.48.
A number of other positives caught investor’s attention in Q2. One was the net margin on the S&P 500. From 8% in 1996, it has grown to a whopping 13% in 2016, indicating that the big players in the S&P 500 are driving up profitability in ‘above the line’ categories like sales, general & administrative, and in cutting interest rate costs or taxes (According to Zacks Investment Management’s Stock Market Outlook report). Another bit of good news is that the up cycle is less overvalued now compared to the 2000 tech bubble and the 2002-07 housing/bank driven cycle. All good signs.
Bottom Line for Investors
With the U.S. economy in what we see as a late stage expansion, while also being surrounded by a number of unknowns including the outcome of the upcoming November election, we at Zacks Investment Management believe it remains of utmost importance to focus on quality.
Healthcare, Materials and Info Tech are expected to remain attractive in the near future, while Consumer Staples, Consumer Discretionary and Financials may continue their unattractive run for some time.
Disclosure