This post was written with contributions from Anqi Dong, CFA, CAIA. Anqi is a Senior Research Strategist on the SPDR® Americas Research Team.
As investors scour the landscape for return-generating opportunities, being able to spot trends is a significant advantage. However, it’s not enough to simply spot overarching market shifts or dynamics. True opportunity lies in using specialized, industry-specific knowledge to capitalize on market events, macro trends, and other changes.
As we begin a new decade, we see three opportunities where we believe investors can benefit from tactical positioning in sector-based strategies.
1. Health Care: Capture stable growth with an attractive valuation Health Care led earnings sentiment with strong and broad earnings beats and faster growth than the broad market in 2019, as shown in the chart below. As we progress into the new year, analysts have upgraded their earnings estimates for the sector, while projections for the broad market continue their downward trend.1
Source: FactSet, as of 12/16/2019. EPS growth estimates are based on Consensus Analyst Estimates compiled by FactSet.
While the sector rallied in the fourth quarter, Health Care stocks lagged the broad market by more than 10% for the full year.2 The sector’s forward price-to-earnings is trading within the bottom quintile over the past 15 years,3 indicating more upside to justify its strong fundamentals.
Health Care stocks may see short-term headwinds as we approach the US presidential election. However, even if a Democratic candidate who campaigned for Medicare-for-all wins the election, the chances of passing the legislation in the near term are unlikely as long as the Senate is controlled by Republicans.
In the meantime, investors can take advantage of the temporary mispricing opportunities driven by political sentiment and benefit from the sector’s steady growth in a late economic cycle environment through an investment in the Health Care Select Sector SPDR® Fund (XLV).
2. Software & Services: Upbeat earnings with less impact of trade uncertainty The Software & Services industry has historically delivered stronger and more consistent earnings beats than the broader market, as businesses quicken the pace of transitioning to cloud-based software solutions.
Source: FactSet, as of 12/26/2019.
Per Gartner’s latest IT spending forecast for 2020, enterprise software spending is expected to grow more than 10% in the coming two years, as larger companies increasingly adopt cloud-based software solutions. After experiencing margin declines in 2018, software companies enjoyed rebounds in EBITDA margins in 2019 and may continue to see margin expansion going forward, as the cloud platform brings scale and operational efficiencies to help lower costs.
Even as US-China trade tensions subsided at the end of 2019, disputes and competition between the two countries over technology will likely be at the forefront of political confrontations in 2020. The growth of US software and services companies may be less impacted by such an unstable political environment given they have lower foreign revenue exposure than the broader Technology sector.4
To pursue the growth potential in Technology without too much exposure to political headline risk, consider an allocation to Software & Services through the SPDR S&P® Software & Services ETF (XSW).
3. Homebuilders: Improving housing markets Steady wage growth and a historical low unemployment rate have supported a healthy housing market. Household debt service payments as a percentage of disposable personal income is at the lowest level in history. After a slowdown in the first half of 2019, homeownership resumed its upward trend in Q3.5
Given that the US Federal Reserve signaled during the December meeting that it plans to hold interest rates steady through 2020, mortgage rates are likely to stay lower for longer, increasing housing affordability.
In December, homebuilder sentiment reached the highest level since 1999 as prospective buyer traffic and sales expectations continue to improve on the back of low supply of existing homes, low mortgage rates, and a strong labor market.6 The improvement in sales prospects has translated into more upbeat earnings sentiment in the industry. As shown in the chart below, earnings revisions for 2020 in the homebuilder industry have turned positive, exceeding the broad market.
Source: FactSet, as of 12/26/2019.
For investors seeking to benefit from strength in the housing market, consider an allocation to the homebuilding industry through SPDR S&P Homebuilders ETF (XHB).
1FactSet, as of 12/13/2019. Earnings estimates are based on Consensus Analyst Estimates compiled by FactSet. 2FactSet, as of 12/13/2019. 3FactSet, as of 11/30/2019. 4FactSet, as of 09/30/2019. 5US Census Bureau, 12/23/2019. 6NAHB, 12/16/2019.
S&P 500® Health Care Index A benchmark comprised stocks included in the S&P 500 that are classified as members of the GICS® health care sector.
S&P 500 Index A popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.
S&P Homebuilder Select Industry Index The index represents the homebuilders segment of the S&P Total Market Index ("S&P TMI"). The S&P TMI is designed to track the broad U.S. equity market. The homebuilders segment of the S&P TMI comprises the Homebuilding sub-industry.
S&P Software & Services Select Industry Index The Index represents the software and services segment of the S&P Total Market Index ("S&P TMI"). The S&P TMI is designed to track the broad U.S. equity market.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
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