S&P's Stovall: Beware of These 3 Stock Sectors as Rates Rise

Tuesday, 12 Aug 2014 06:50 PM

By John Morgan

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Three types of stocks could end up being a trap in coming months, and prudent investors should not expect favorable returns from them, according to Sam Stovall, chief equity strategist at S&P Capital IQ.

His sectors to shun are those that could be hurt by a spike in interest rates or tightened money policy by the Federal Reserve.

“From a historical standpoint, let’s face it. Over the coming year or we will be in a rising rate environment,” he told Yahoo Finance. “In our opinion and of most on Wall Street, and since 1970, the three sectors with the worst average performance in a rising interest rate environment have been utilities, telecom and financials.”

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

Financials are not cheap at this time. Stovall said they are trading at an 18 percent premium to their relative valuation compared with the S&P 500.

“So in our belief, the financials are more than discounting a recovery in the U.S. economy, and lastly from a technical perspective, the group is appearing to be rolling over.”

Stovall’s view of utilities is no brighter. “Utilities, I think, are going through a counter-trend rally right now, but if we want to talk expensive, here is a group that is trading at 3 times its 5-year projected growth rate versus 1.4 times for the S&P 500.”

He said investors have been gravitating to utilities because their dividend yields are attractive. “But I think they should yield to caution at this point,” he advised.

As for telecoms, Stovall said they likely also too rich for comfort – historically, telecoms are poor performers in rising rate environments, and he said the sector is now trading at a 26 percent premium to its long-term valuation compared with the S&P 500.

Is there any other stock sector Stovall is wary of now? “You can probably throw in consumer staples for good measure,” he said.

On a positive note, he told Yahoo Finance that sectors that could do well now include energy, industrials, health care and information technology.

USA Today reported that only 191 large-company stock funds, or 27 percent of the total, are beating the S&P 500’s gain of 5.65% through July 30.

“The funds that have been most likely to beat the S&P 500 this year have had a value tilt — that is, the funds look for beaten-down stocks that Wall Street hates,” USA Today said.

The newspaper said the three top large-company stock funds in 2014 are: PIMCO StocksPLUS Long Duration fund, up 18.1 percent; Advantus Strategic Dividend Income,  up 15.2 percent; and Invesco Exchange Fund, up 10.9 percent.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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