Portfolio Allocation - Late 2008
Suggested Sector & Industry Weightings in the 2nd Half of 2008
In the shadow of early 2008's market turmoil, yesterday's leaders are being replaced by yesterday's laggards. In other words, don't expect basic materials and energy stocks to hand over the same outsized gains they did last year.
Why? With inflation being tamed and the Federal Reserve telling investors they don't plan on cutting rates any further (barring a disaster), the conditions that ushered oil and materials stocks higher can no longer do so. Now it may be time to focus on opportunities in other sectors.
Specifically, certain groups should be overweighted, or underweighted. A ranking methodology designed to detect shifts in strength - also called sector rotation - is suggesting the following adjustments to investor portfolios through the rest of 2008.
Sectors to Underweight
- Energy - While energy companies will still benefit from sustained oil prices, the 'growth' in the arena is likely to be in the past. Even mediocre earnings will disappoint shareholders, which means there's a risk of profit-taking in this sector's stocks.
- Basic Materials - Inflation was the key driver behind accelerated commodity prices, but inflation was largely a function of the Fed's decision to incrementally drop interest rates. With no more rate cuts on the way coupled with already-stifled inflation, these stocks are no better positioned than any other.
Sectors to Overweight
- Technology - The outperformance has already started, as this group is one of the top performers for the last several weeks. As the economy finds firmer footing, consumers and corporations will feel more confident about spending on technology.
- Transportation - Transportation stocks are often the quiet beneficiaries of a recovering economy, and this time isn't likely to be any different.
- Healthcare - This is more of an 'undervalued' strategy, though the rotation principle still applies.
- Industrials - For the same reason technology stocks stand to gain as the economy moves from weak to strong, the industrial stocks - manufacturers of all sorts of goods - are likely to benefit from stronger consumer demand.
Neutral Sectors
- Utilities - In a bearish environment, utilities can be attractive because they're consistent. In a bullish environment, that consistency can be a curse, as most investors are seeking something with more growth potential.
- Telecom - Much like utilities, 'business-as-usual' telecom can be unattractive compared to companies able to take full fiscal advantage of a wave of economic growth.
- Consumer staples - Consumers will always need soap, toothpaste, and detergent, but it's not like they'll need more of it in a strong economy.
Bear in mind these are strictly forecasts based on a rotation-spotting technique, and not all of them may be correct. On the other hand, even if only half are right, the added benefit to portfolio bottom lines can be tremendous.
