The bottom line: While an uptick in volatility doesn’t herald an end to the bull market, it does imply that investors may want to revisit their investment positioning and exercise more caution toward momentum plays of all shapes and sizes.
Market Realist – Which sectors should you invest in?
The graph above shows the current and historic PE (price-to-earnings) ratios for nine sectors and of the S&P 500 (SPY). Energy (XLE) and financials (XLF) look relatively attractive compared to the rest. While energy stocks have been driven down due to the slump in oil prices, they look attractive, as oil prices seem to be bottoming out.
The financials sector had a poor earnings season in 4Q14, which led to its recent underperformance. However, if the economy improves, financials may perform better, as credit growth would improve. However, as we pointed out earlier, recent economic data point to a slowdown in 1Q15.
Meanwhile, healthcare (XLV) and the consumer-related sectors are appearing expensive, as we discussed in Part 3 of this series.
While technology stocks (QQQ)(XLK) look slightly expensive relative to some of the other sectors, remember that tech stocks have historically traded at a premium compared to other sectors due to strong balance sheets and robust earnings. In fact, the sector is well poised to navigate through the rising rate environment due to lower debt-to-equity ratios and very high cash flows. Mature tech companies reported robust earnings in 4Q14. However, their earnings could be hit this quarter due to a stronger dollar (UUP). Despite that outlook, the tech sector could continue to perform well, due to the factors we cited above.
Read our series on 5 Reasons Why the NASDAQ’s 5,000 Level is Different This Time for more on why tech stocks could continue to perform well.