Stock market volatility has reached elevated levels over the last several weeks, and this has led many investors to focus on key sector holdings as a protective measure. But in order to understand which sectors are actually capable of providing security for conservative portfolios, it is important to look at their relative valuations.
Here we have the best and worst performing sectors over the last year as a way of deciding the potential for renewed rallies in the weeks ahead.
Over the last year, the consumer discretionary sector has turned in a surprising performance (producing gains of 22.02% for the period). This activity has been relatively consistent throughout the year, as the SPDR Consumer Discretionary Select Sector ETF (NYSEARCA:XLY) has remained elevated in both bullish and bearish environments. At the same time, its price-to-earnings ratio (P/E) valuation remains the lowest amongst the top four performing sectors (at 16.5x TTM earnings). This suggests that those long the consumer discretionary sector have the benefit of low valuation, bullish momentum, and likely support from major declines in the event stock markets take a significant downturn.
Health care represents the second-best performing sector in the financial markets and the SPDR Health Care Select Sector ETF (NYSEARCA:XLV) is currently showing gains of 14.63% for the year. ETFs like XLV may be at risk for reversal, however, as the sector is currently trading with an elevated P/E valuation (18.2x TTM earnings). The sector’s price-to-sales ratio (P/S) remains a bit more supportive (at 1.2x TTM), which is in the lower half of the broader averages seen throughout the market.
On the bearish side of the equation, the communication services sector has been the market’s major laggard. The SPDR Communication Services Select ETF (NYSEARCA:XLC) has posted declines of 7.27% over the last year. These losses have been mitigated to some extent by the sector’s elevated dividend yield (4.83%), which is the best sector payout available in the market. The price-to-sales ratio found within the sector is roughly in-line with the market averages (1.3x TTM), but its P/E valuation is the highest in the market (at 22.6x TTM earnings). Overall, this suggests share prices could remain under pressure as we head into next year.
Additional weakness can be found within the materials sector, as the SPDR Materials Select Sector ETF (NYSEARCA:XLB), which has lost 5.20% over the last year. The potential for a bullish reversal here is strong, however, given the valuations currently seen throughout the sector. The materials sector is currently trading with a below average price-to-sales ratio (at only 1.1x TTM), and its P/E valuation looks similarly attractive (at 13.2x TTM earnings). All combined, these lower valuations increase the chance that we will see a bullish reversal in the sector as we head into next year.
Disclaimer: The author and Spotlight Growth has no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.
Article By: Ric Cox