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Wall Street had a choppy ride in 2022 due to rising rate worries. Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices led Fed members to enact several rate hikes last year. While Wall Street started 2023 on a positive note on cues of slowing inflation and slower Fed rate hike momentum, the volatility is not off yet.
Per the latest Fed minutes, interest rates will continue moving higher amid the ongoing inflation concerns but at a slower pace, which the Fed officials think is the best way to manage the risks of raising rates. At the same time, they are also concerned about stopping or slowing their inflation-fighting campaign too soon. The central bank raised interest rates by 25 bps last month after hiking the same by 475 bps last year in the fastest hike since the 1980s.
JPMorgan Chase’s chief executive Jamie Dimon said in an interview with CNBC on Thursday, as quoted on Reuters, that U.S. interest rates could touch as high as 6%. No wonder, the Nasdaq, heavy on technology and growth stocks, was downbeat last year. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.
"Bear markets have historically resulted in leadership change, which suggests old economy sectors are likely the winners of this cycle," Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy said in a note earlier this week, as quoted on Yahoo Finance. Bank of America hinted that its analysis of equity risk premium shows that growth stocks are not pricing in the recession risk.
Whatever be the case, there are signs of a looming change in sector leadership. Against this backdrop, below we highlight a few sectors and their ETFs that are deemed to hail from the old economy. These sectors still offer a cheaper valuation.
Sector ETFs in Focus
Energy – Energy Select Sector SPDR ETF (XLE - Free Report) – P/E 16.64X versus S&P 500’s P/E 21.70X
Despite gaining as much as 30% in the past year, XLE is still undervalued compared with the S&P 500. Investors should note that global recession fears are probably too high to be true. The January 2023 IMF World Economic Outlook Update projects global growth will decelerate to 2.9% in 2023 but rise to 3.1% in 2024.
The 2023 forecast is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook. IMF’s higher projection for global growth should augur well for oil prices. Plus, China reopened its economy at the end of the Tiger year. This was a plus for economic activities. Meanwhile, Russia has cut oil output. Organisation of Petroleum Exporting Countries (OPEC) has also kept output under check.
The Materials sector is riding higher on higher demand for materials and will likely continue its trend as the economy gains steam. The sector has been underinvested for long. The valuation of the sector (down 0.3% past year) is still cheaper even after beating the S&P 500 (down 5.7%) in the past year. Supply chain woes as well as high inflation will keep the prices of commodities and materials higher.
Housing – iShares U.S. Home Construction ETF (ITB - Free Report) – P/E 16.59X
This ETF also beat the S&P 500 in the past year (up 4.4%) and still possesses a cheaper valuation. The U.S. housing sector is showing signs of improvement, with confidence among builders on the rise. Demand for homes has picked up, driven in part by slightly lower mortgage rates. This is especially true as U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022.
The National Association of Home Builders/Wells Fargo gauge of builder sentiment increased to 42 in February, the largest monthly gain in 10 years. Builders in all four regions reported an increase in confidence (read: Homebuilder Confidence Rises Most in a Decade: ETFs to Tap).
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Old Economy Investing is Back: Sector ETFs to Win
Wall Street had a choppy ride in 2022 due to rising rate worries. Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices led Fed members to enact several rate hikes last year. While Wall Street started 2023 on a positive note on cues of slowing inflation and slower Fed rate hike momentum, the volatility is not off yet.
Per the latest Fed minutes, interest rates will continue moving higher amid the ongoing inflation concerns but at a slower pace, which the Fed officials think is the best way to manage the risks of raising rates. At the same time, they are also concerned about stopping or slowing their inflation-fighting campaign too soon. The central bank raised interest rates by 25 bps last month after hiking the same by 475 bps last year in the fastest hike since the 1980s.
JPMorgan Chase’s chief executive Jamie Dimon said in an interview with CNBC on Thursday, as quoted on Reuters, that U.S. interest rates could touch as high as 6%. No wonder, the Nasdaq, heavy on technology and growth stocks, was downbeat last year. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.
"Bear markets have historically resulted in leadership change, which suggests old economy sectors are likely the winners of this cycle," Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy said in a note earlier this week, as quoted on Yahoo Finance. Bank of America hinted that its analysis of equity risk premium shows that growth stocks are not pricing in the recession risk.
Whatever be the case, there are signs of a looming change in sector leadership. Against this backdrop, below we highlight a few sectors and their ETFs that are deemed to hail from the old economy. These sectors still offer a cheaper valuation.
Sector ETFs in Focus
Energy – Energy Select Sector SPDR ETF (XLE - Free Report) – P/E 16.64X versus S&P 500’s P/E 21.70X
Despite gaining as much as 30% in the past year, XLE is still undervalued compared with the S&P 500. Investors should note that global recession fears are probably too high to be true. The January 2023 IMF World Economic Outlook Update projects global growth will decelerate to 2.9% in 2023 but rise to 3.1% in 2024.
The 2023 forecast is 0.2 percentage point higher than predicted in the October 2022 World Economic Outlook. IMF’s higher projection for global growth should augur well for oil prices. Plus, China reopened its economy at the end of the Tiger year. This was a plus for economic activities. Meanwhile, Russia has cut oil output. Organisation of Petroleum Exporting Countries (OPEC) has also kept output under check.
Materials – Materials Select Sector SPDR ETF (XLB - Free Report) – P/E 16.54X
The Materials sector is riding higher on higher demand for materials and will likely continue its trend as the economy gains steam. The sector has been underinvested for long. The valuation of the sector (down 0.3% past year) is still cheaper even after beating the S&P 500 (down 5.7%) in the past year. Supply chain woes as well as high inflation will keep the prices of commodities and materials higher.
Housing – iShares U.S. Home Construction ETF (ITB - Free Report) – P/E 16.59X
This ETF also beat the S&P 500 in the past year (up 4.4%) and still possesses a cheaper valuation. The U.S. housing sector is showing signs of improvement, with confidence among builders on the rise. Demand for homes has picked up, driven in part by slightly lower mortgage rates. This is especially true as U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022.
The National Association of Home Builders/Wells Fargo gauge of builder sentiment increased to 42 in February, the largest monthly gain in 10 years. Builders in all four regions reported an increase in confidence (read: Homebuilder Confidence Rises Most in a Decade: ETFs to Tap).