It is hard to believe it is already August isn’t it? The market will be hard pressed to repeat its more than solid performance in July as August has become the worst performing month on average over the past couple of decades. We also have a contentious and rancorous election ahead of us. Equities remain locked in a “profit recession” with five straight quarters of year-over-year earnings declines within the S&P 500. Small caps & biotech were big winners in July as were high yield plays as the 10-year treasury bond sank below 1.5%. So which sectors of the market will outperform and underperform the markets in August? Here is an outlook for sectors to avoid and sectors to overweight.
Financials – Low yields are killing banks’ net interest rate margins as well as returns on Insurers’ bond portfolios, both major sources of earnings. Regardless of which candidate wins in November, it is hard to see regulatory easement on the major banks in the near future. Brexit is another complication and credit quality is starting to slowly worsen after six years of improvement.
Energy – Oil has gone from $50 a barrel in mid-June to $40 a barrel in trading today as crude is back into an official bear market. Rigs have started to increase domestically over the past month and oil and distilled products in storage are at very high levels. Combined with a weak global economy and strengthening dollar, energy should remain under pressure.
Industrials – Global demand is at the weakest levels since 2009. In addition, over the past three quarters domestic GDP has averaged one percent; just above stall speed. Add in a strong dollar and worldwide overcapacity, this is another sector I have as an underweight.
Biotech – After spending almost a year in the longest and deepest bear market since 2008, biotech had a great July and rose more than 10% during the month. The sector is just right at upward resistance levels and if it can break through, the next leg of the rally could be at hand. Even with the recent rise, biotech is some 25% below its peak last summer. We have also seen better than expected earnings this quarter from stalwarts like AbbVie (ABBV), Amgen (AMGN) and Celgene (CELG) among others as well.
Housing & Infrastructure – Housing starts this year are above the levels of 2015, which was the best year since 2007. New home sales in June came in at the best levels in eight years. Mortgage rates are at historical lows and the home ownership rate is at the lowest point since 1965. Barring a major recession, we should years of increasing housing activity as pent up demand gets released.
In addition, the need for additional infrastructure spending is one of the few areas of agreement from the two major parties and I expect a substantial infrastructure spending bill in 2017 regardless of who wins in November. Some attractive plays in this space include Lennar (LEN), LGI Homes (LGIH), Tutor Perini (TPC) & Sterling Construction (STRL)