Better long-term values: Is it time to overweight cyclical stocks?

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Nov. 26 2019, Updated 12:31 p.m. ET

Certain Cyclical Sectors: In recent years, investors have been paying a big premium for the yield and relative safety of defensive sectors such as consumer staples and US utilities. In contrast, I’d put new money to work in cyclical sectors such as energy and technology, which arguably represent better long-term values than their more expensive defensive counterparts. These sectors are accessible through the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) and the iShares Dow Jones U.S. Energy Sector Index Fund (IYE).

Market Realist –The graph above compares the returns of the S&P 500 (SPY)(IVV), the technology sector (XLK), and the consumer staples sector (XLP). The S&P 500 has outperformed both sectors, with returns of 36.9% in 24 months compared to 29.3% for technology and 25% for consumer staples.

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Typically, cyclical sectors such as technology and energy (XLE) outperform defensive sectors during economic upturns. Cyclicals are high-beta stocks—they outperform the rest of the market during bull markets and underperform the rest during bear markets. Currently, the consumer staples sector has a price-to-earnings or PE ratio of 20.1x versus 18x for the technology select sector SPDR (XLK).

As the economy continues to grow steadily, you may consider moving into the cyclical sector and underweighting the defensives.

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