Tips to consider before investing in the stock market
Here are a few tips to consider before investing in the stock market! Sectors across the stocks market do not generally move in strict synchronization. While some stocks will lead, others lag. This raises an important question for investors on which sector is poised to move up fastest next.
In the bull market that started in late March, the technology sector initially led the way. Companies like Amazon.com climbed faster than the rest of the market. Technology Select Sector SPDR (XLK), an exchange-traded fund that tracks an index of technology stocks, surged 73% from March 20 through Aug. 31. Also, the S&P 500 index advanced 52% over the same period, according to Dow Jones Market Data.
So which sector is poised to lead the market higher next? As usual with the stock market, the answer depends on whom you ask.
Cheap Midcap Stocks
According to UBS Group, shrewd investors should look for sectors with cheaper valuations such as midcaps to start playing a greater leadership role.
Midcaps are often defined as stocks with a market value between $2 billion and $10 billion. From the start of the bull market on March 20 through August, iShares Russell Mid-Cap ETF (IWR), which tracks the Russell Midcap Index, has returned 54%. This lags behind tech stocks but it is performing a little better than the S&P 500. However, if history is any indication, midcap stocks could start to take the lead if the economy improves.
According to UBS data, in the two decades through December 2019, the Russell Midcap Index’s total annualized return of 9.1%. It topped that of both the S&P 500 and the Russell 2000 small-cap index.
According to Jack Ablin, international stocks look like a good bet for future market leadership for a number of reasons.
First, the economic situation is currently better outside the U.S. than inside, he says. While the American economy has rebounded somewhat since the crash in the second quarter, other countries have gone beyond rebound and into a real recovery.
Second, foreign stocks tend to be cheaper than U.S. stocks currently. “International equities might not be cheap, but they are cheaper on a relative basis”. “We are moving from something expensive to not quite as expensive.”
For example, the price of stocks as a multiple of what investors expect them to earn in the next year (the forward price/earnings ratio) is higher in the U.S. than in the other regions. The forward P/E for the MSCI index in the U.S. is 22.7, versus 18 for Japan and 17.7 for Europe, according to a report from Yardeni Research.
The third factor that favors non-U.S. stocks is a weakening U.S. dollar. If the dollar is going down, owning stocks that are priced in currencies that are rising in value is a better bet for investors.
Jack Ablin is the chief investment officer and founding partner of Chicago-based wealth-management form Cresset Capital.
In the U.S, this year features a presidential race. There is useful historical data back to 1992 on which sectors tend to do well in the three months before an election.
Energy and financial stocks market beat the market most frequently in the months before the election. This is closely followed by health care and industrials.
Based on past data, there is one sector that investors should consider avoiding over this period. In the three months before voting day, consumer-staples stocks, such as toothpaste manufacturers, have lagged behind. There has only been two times the sector did better. 2000 and 2008, respectively, the years of the dotcom bust and the financial crisis that took hold in September 2008.