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9 Sectors That Investors Should Watch in 2019

Health care will remain a top performer.

Health care, consumer discretionary and real estate were among the best performing sectors in 2018, and at least two of these sectors should rise in early 2019. Sam Stovall, chief investment strategist at CFRA Research in New York, says the beginning of the year can be good for the stock market. Gains in May and October are less, up 1.4 percent on average 64 percent of the time, and defensive sectors like health care and consumer staples sectors hold up best, he says. “That sort of justifies the old adage that says when the going gets tough, the tough go eating, smoking and drinking,” Stovall says. Here are nine sectors to watch.

Financials

James Hickey, chief investment strategist at HD Vest in Irving, Texas, says in the financial sector, he likes business development companies. BDCs invest in small- and medium-size companies with preferred status or direct equity investments. Even though the Federal Reserve is raising interest rates, Hickey says he expects these business to do well in 2019. BDC loans are usually prime plus or Libor plus, the prevailing interest rate. “If the Fed raises rates, it just means they make more money so that’s a very good place to be,” he says. The federal government also just expanded the leverage BDCs can use to make loans, which means they have more capital to deploy.

Health care

With uncertainty in the markets, Olivia Engel, chief investment officer of active quantitative strategies at State Street Global Advisors, says investors should look at defensive sectors, such as health care. Over the last 10 years, health care has done well, in part because of demographics with an aging population, she says. Even though it’s traditionally considered a defensive sector, health care also benefits from higher earnings growth. Health care is 2018’s top performing sector. To find reasonably priced companies, Engel recommends looking in the “more boring parts of health care” rather than the high-growth areas.

Industrials

Another defensive sector, industrials, has pockets of opportunities, Engel says. She’s staying away from natural resource companies, which she says are too risky now given economic uncertainty and market volatility. Instead, she sees reasonable values in the waste management side of the industrial sector. Waste management companies can provide pollution control, environmental services and recycling centers. “It’s the least glamorous part of equity ownership, but nonetheless, it’s a necessary part of our lives,” she says. Examples in the sector include Waste Management (ticker: WM), which is closer to its 52-week high, and US Ecology (ECOL) trading in its 52-week midrange, to name a couple.

Technology

The recent stock market sell-off has hit the high-flying technology sector hard, particularly some of the former darlings like Apple (AAPL). Some telecommunication and technology stocks may have a further downside. However, Ernest Cecilia, chief investment officer at Bryn Mawr Trust, says technology is an eclectic sector and contains some companies that don’t garner nearly the same attention as Apple. He says investors looking for beaten-up stocks in the technology downdraft might be better served by looking at less cyclical names like software, credit card processors and payroll providers.

Consumer discretionary

With high consumer confidence and low unemployment, Cecilia says the consumer discretionary sector should still hold up. If wage growth begins to kick in, that will also support the sector. Investors need to be selective about which companies they choose, since some retailers have been hit by “the Amazon (AMZN) effect” — that is stores unable to compete with the behemoth online retailer. Cecilia says to look at companies that have “developed a moat” around some of the challenges associated with the Amazon effect and are finding other ways to lure consumers to shop at their stores.

Energy

Investors should have some exposure to the energy subsector, Cecilia says, although he is not overweighting it for 2019. Energy prices in the U.S. and globally have been under pressure. Part of the weakness in oil prices in the U.S. is the pickup in domestic shale production and the Trump administration’s decision to release barrels from the Strategic Petroleum Reserve. Right now the global energy market has a fair balance between supply and demand, but investors wanting to add energy exposure should look at exploration and production companies with very efficient operations that generate strong cash flow and dividend growth, he says.

Materials

Threats of a U.S. trade war with China along with prospects of a slowing economy, a strengthening of the U.S. dollar and other factors are hitting the materials sector, Stovall says. The sector is down 14 percent, the worst performer of the year among the other main equity sectors and much of the decline stems from the fact that many materials companies get more than 50 percent of revenue from overseas operations. These losses make the sector worth a look for value investors. However, Stovall says be nimble by studying the technical chart price patterns for particular firms before buying to get a feel for possible outlooks.

Telecommunications

A shake-up of the telecommunications sector in September made significant changes, putting some technology stalwarts like Facebook (FB) and Netflix (NFLX) into the revamped sector. Still Cecilia says there are some areas to like. He says investors should avoid those stocks with high price-earnings ratios and look at firms with lower debt, especially in light of rising interest rates. Cecilia suggests investors look at more traditional telecommunications companies, such as Verizon Communications (VZ), which he says is positioned well and is conservatively managed.

Aerospace

The aerospace subsector has seen a strong price run up this year in part due to a jump in U.S. military spending. Cecilia says he likes the sector and owns select companies that are part of aerospace’s supply chain, developers and designers. Even with the subsector’s stout performance, he says opportunities remain. The aerospace industry usually does well in late economic cycles, he adds. “As the economic cycle matures you usually get plane orders,” he says. One of the ways to play it is by investing in suppliers to the industry, Cecilia says.

Watch these nine investment sectors in 2019.

To sum up, consider these nine investment sectors in 2019:

— Financials

— Health care

— Industrials

— Technology

— Consumer discretionary

— Energy

— Materials

— Telecommunications

— Aerospace

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9 Sectors That Investors Should Watch in 2019 originally appeared on usnews.com