Stock market sector winners and losers for the rest of 2020.
This year, the pandemic has upended the stock market. It created winners and losers not only among individual companies but also among the 11 S&P 500 sectors. For example, the energy sector is by far the worst-performing sector of the index, having lost roughly 40% year to date as the economic shutdown dried up demand for oil. That said, the information technology sector has gained around 35% over that time as the pandemic has accelerated the shift toward working, learning and playing at home via the internet. To help investors navigate the changing sector landscape, here are some of the best sectors to invest in for the rest of 2020.
Because the tech sector is the best performer this year, it might not be a bad idea to start there. While the strong growth might make some investors worried that tech stocks are expensive, the shift toward remote working has made cloud computing services and infrastructure more valuable, says Luke Lloyd, wealth advisor and investment strategist with Strategic Wealth Partners. “We don’t see this going away anytime soon,” Lloyd says, adding that many small businesses haven’t built out the systems that will allow them to be competitive in the new technological landscape. That helps give the likes of Microsoft Corp. (ticker: MSFT), with its Azure cloud service, room for growth. Additionally, the prospect of low interest rates for a long time means growth is scarce and investors are willing to pay up for it, a factor that supports tech stocks, says Matthew Fox, founder of Ithaca Wealth Management.
Lloyd also likes the health care sector because of long-term demographic trends. An average life expectancy around the globe that has been on the rise stands to benefit pharmaceutical companies and makers of medical devices, Lloyd says. Meanwhile, he also likes the trend in telehealth — led by companies like virtual care provider Teladoc Health (TDOC) — which includes people engaging in doctor visits via telephone or video conference, given concerns about maintaining social distancing. While the pandemic did put a dent in people seeking nonessential services, that is only a temporary headwind, Lloyd says.
Pandemic-related pantry loading and cooking from home have benefited many consumer staples companies, such as Walmart (WMT) and Costco Wholesale Corp. (COST). The sector hasn’t had the blockbuster growth like that seen in some other sectors, but it remains a solid choice for a defensive portion of investors’ portfolios. “Expect the pandemic to solidify the thought in millions of Americans’ minds that their pantry should be loaded with nonperishable foods,” Fox says. And come November, if there’s a sell-off in stocks over tax concerns if Joe Biden wins, companies in the defensive consumer staples sector might not sell off as much as others, Lloyd says.
The communication services sector offers both growth and value companies. Investors get exposure to popular “FAANG” stocks like Netflix (NFLX), Facebook (FB) and Alphabet (GOOG, GOOGL) while at the same time getting stable utility-like businesses such as Verizon Communications (VZ). “The last thing people will ditch is their cellphone bill, so it’s a stable business that generates substantial free cash flow even in times of economic uncertainty,” Fox says. Plus, Netflix has been a beneficiary during the pandemic as lockdowns have provided even more of an incentive for people to stay home and binge-watch shows.
Although the economy is far from out of the woods, personal disposable income in the U.S. has been helped by government stimulus checks and expanded unemployment benefits. While Americans have spent that money on all sorts of things, or socked it away into savings, companies that have benefited during the pandemic include home improvement store Home Depot (HD) and Amazon.com (AMZN). However, congressional wrangling has cast a shadow over future fiscal relief for Americans, potentially putting a damper on future disposable income.
It’s not just home improvement retailers in the consumer discretionary sector that have benefited from the increased interest in do-it-yourself projects as more people stay home. So have paint manufacturers in the materials sector, says Sameer Samana, senior global market strategist with Wells Fargo Investment Institute. He also notes that a lot of the chemicals used in high-demand sanitizers are made by companies in the sector. Samana adds that he likes commodities, especially precious metals. The materials sector includes gold miners such as Newmont Corp. (NEM). Gold prices have rallied from the low $1,500s to start the year to around $1,950 by early September, as the value of the precious metal surged almost 30%.
Call this one a bargain-hunting opportunity. Banks have been facing headwinds from low interest rates, but they recently got a shot in the arm from a change in Federal Reserve policy. While short-term interest rates are likely to remain low for a long period of time, longer-term rates have been on the rise as the central bank said it will allow inflation to run higher than it has in the past. “When the yield curve is steep, banks are able to borrow money at lower interest rates and lend at higher rates,” says Robert Johnson, CEO of Economic Index Associates. The improved economic prospects for the sector have combined with lower valuations to give the sector a much larger margin of safety than other sectors that have performed well in the current rally, Johnson says.
Best stock market sectors for the rest of 2020:
— Information technology
— Health care
— Consumer staples
— Communication services
— Consumer discretionary
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Update 09/02/20: This story was published on an earlier date and has been updated with new information.