Summary: Now is a good time to form an outlook for the 2nd half of 2022. The Fed’s recent announcement has provided the needed rates clarify for the remainder of the year, and many bellwether stocks issued their earnings. And we see the energy sectors represented by the Energy Select Sector SPDR ETF (XLE) to be the most attractive sector currently. In contrast, I see too much valuation risk in traditional “safe-haven” sectors such as REITs and utilities.
We use the following market sector dashboard to put our finger on the pulse of the market and its major sectors. Feel free to download or export the google-sheet via the following link: Market Sector Dashboard -> https://docs.google.com/spreadsheets/d/1GGf9a66XMYmjJCu3qaYaNCVKCr0ZWCvuS6UoC-v9wYM/edit#gid=121972095
Especially, the simple yield spread (the TTM dividend yield minus the 10-year Treasury rates) is the first thing we look at. They give us a 30,000 feet view of where to look further - which sector, growth stocks, value stocks, bonds, or precious metals, et al. We will detail the meaning of each entry in the next section, and we update the dashboard monthly.
More specifically, for the energy sector represented by XLE:
- XLE currently is supported by strong fundamentals (imbalance in oil and natural gas supply-demand). On the technical side, its price has corrected for about 4% in the past quarter. On the valuation side, both its dividend yield and the yield spread relative to the risk-free rates are at a very attractive level. The conflict in Ukraine provides a near-term catalyst to XLE.
- The dashboard also shows that XLE is also attractively valued compared with other sectors. And next to the energy sector, small-caps are also at an attractive level currently, followed by the health sector.
- Sometimes, a sector is made attractive (or unattractive) by 1 or 2 stocks that have disproportionate weights. However, it is not the case here. We have examined several of leading stocks in XLE, including Exxon Mobil Corp (XOM), Chevron Corp (CVX),Occidental Petroleum (OXY), and Suncor Energy Inc (SU). And we feel they are all attractive in terms of valuation, profit outlook, and growth prospects.
- In contrast, the utility sector (represented by XLU) is the most overvalued sector when adjusted for risk-free rates.
If you’d like to see more detailed analysis of the energy sector, utility sector, and their leading stocks such asExxon Mobil Corp (XOM), Chevron Corp (CVX), NextEra Energy (NEE), visit our Shopify Site https://envisionret.myshopify.com/ for more in-depth reports.
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