I will begin by simply wishing the people of Egypt a fast and sound solution to their present challenges. Geopolitics impact markets and we saw that Friday. Investors sold many discretionary and technology holdings to retreat to the perceived safety of consumer staples and cash. Energy and commodities rallied as Middle East concerns brought the usual spike in oil prices. I made no changes to the portfolios I manage. Although the aforementioned concerns are real, many investors were probably waiting for any reason to take profits from the past several weeks off the table.
With energy back in the headlines, I want to share information on the sector as derived from Standard & Poor’s:
Energy represents about 12.5% of the S&P500 and has a stronger year-to-date performance (as of 1/21/11) than the broader index.
The outlook for the sector is neutral to slightly positive for 2011. Outperformance is viewed as unlikely. (I agree and plan to maintain normal, marketweighting in the sector with no bias either way).
Crude oil forecasts for 2011 price it at an average of $88.29.
Integrated Oil & Gas companies are favored over other types of firms in the sector.
Earnings season, when viewed as a whole, has surpassed most analysts projections. My outlook for equities remains positive; however, the markets are likely to be volatile this week and perhaps into February. I will look for investments that may benefit from a weaker U.S. dollar and higher inflation like commodities. Dividend paying stocks and high yield bonds may also earn their keep during this period. Municipal bonds are continuing to provide some pretty compelling opportunities. If I had to pick my favorite three stock sectors as February begins, I would go with industrials, materials, and energy.
The only problem with this is summed up in my favorite quote for the week – “It requires considerable will power to keep from following the crowd.” ~Ben Graham. The crowd seems to be agreeing and stocks may be a bit overbought. If your investable cash has been put to work, stick with the plan. If you have cash to put to work, sector selection may prove important in February.
Important disclosure: Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Have a great week!