After a negative performance in 2020 the energy sector has accelerated based on President Biden’s energy actions, including the suspension of new oil and gas permits on federal lands and waters and the cancelation of the Keystone XL oil pipeline project.
Due to supply and demand the price of gas shot up $0.50 per gallon, providing favorable earnings sentiment. Contrary to the big performer last year, technology and its high digital demand has cooled down.
Tech’s performance during the Biden administration is at the bottom of the pack, though analysts still favor the technology sector for long-term goals. Just for the short cycle swing momentum, however, technology has diminished.
Consumer discretionary stocks appear expensive based on all metrics. GDP, retail sales, and new home sales reports are at their best in decades and are starting to peak.
Strength in the services sector was driven by increasing vaccinations and gradual return to normalcy, as evidenced by solid quarter-to-quarter growth in air transportation (+11.5%), accommodations (+9.5%), and food services (+5.8%).
Recent year-over-year readings were strong: The producer price index is up 3.1%, the consumer price index up 1.6%, import prices up 6.9%, and export prices up 9.1%. Durable goods orders rose by 0.5% during the month, against economist estimates for a 2.3% increase.
Similarly, manufacturing activity has created a positive economic backdrop for two sectors, respectively, industrials and materials, which are seeing upbeat momentum and posting modest returns.
Financial institutions are getting much support from the U.S. Small Business Administration from the second-draw PPP Loans as banks are paid a fee for distributing funds to small businesses and because it increases their customer base.
Corporate tax increase?
Rising interest rates have strained momentum and sentiment in utilities. However, these stocks still deliver a solid return and dividend so investors can feel good by having these positions within their portfolios.
In addition, healthcare appears cheap relative to the S&P 500. The Covid 19 vaccine has provided a lot of positivity in this sector.
While the S&P 500 continues to hit new all-time highs on much of the same news, the big question is what happens when higher interest rates start to put pressure on equities? Or when Biden signs an increase in the corporate tax rate from 21% to 28%?
A 28% tax rate would clip corporate earnings by 9% in 2022. Investors thus should brace for a little more market volatility and make necessary rotations within their portfolios.
As you know it’s not easy to predict the future. Strategic asset allocation sets the foundation for your achieving your goals and objectives and diversification is the cornerstone for creating efficient and optimal portfolios.
As well all know too well, investing comes with uncertainty and that makes diversification and discipline even more important. Having a diversified portfolio within and across asset classes is the key to long-term success.