According to the UMarketz’s broker the past six months, investors have been wary of companies that seem to constantly lose money and not be able to turn a profit. The industrial and materials sectors of the S&P 500 have tanked 6.49% and 7.47%, respectively since Aug 16, according to research out of UMarketz Research.
That makes each sector the worst performer from within this index over this time span with a decline close behind at 3%. However, it is not all bad as there are some bright spots: less than 20 percentage points below the 50-day moving average has occurred which marks an extreme level in recent history for stocks held by these two industry groups especially considering how far down equity markets go before interest rates climb up again or inflation causes prices to rise dramatically more.
Industrial Stocks Taking The Hit
The UMarketz broker says as the global economy has slowed down, industrial stocks have suffered a drop in confidence. For starters, as companies invested more during economic upswings and less so now that they are not investing at all due to pressure from both margins–labor shortages/raw material price inflation-the recent financial impact came via this lack of investment which could already be causing some damage.
Hence, a great deal of this sector’s volatility levels has been tied to interest rates rising but also China’s economy which is slowing down. This has led some investors to shy away from the companies that are involved in the production process as they tend to be more sensitive to rising input costs and therefore see their prices fall whereas those who sell finished goods are less likely to be affected.
However, UMarketz broker is arguing that this may just be an opportunity to buy into these markets as there are many signs indicating the choppy waters will subside in due time – at least compared with recent decades when investors puked out all they had during healthy market environments.
UMarketz broker says this sector seems near its critical inflection point; maybe it has already passed through here before without much notice on either side because both breadth & momentum were weak beforehand while prices hit record highs or close enough anyway.
However, it is important to note that the prior support line held on without prices moving lower. A break below this would give a new downside target which maybe around $105 per share and this level might not hold as seen on the weekly chart.
The UMarketz broker says it seems like investors have lost interest in certain stocks altogether after only a few months. The S&P 500’s energy sector is another example of this decline in confidence, with prices falling almost 13% since Aug 16th.
Looking Away From Basic Materials
According to the UMarketz broker, basic materials stocks have become unappetizing too as they tend to underperform during an interest rate tightening environment. It is no secret that these types of companies are extremely sensitive to shifting economic forces and so far this year, those forces have been negative.
Since August, the UMarketz broker says these stocks have traded down on more than 70% of days, and on nearly half of those days, they moved lower by two standard deviations or more which happened only 7 times during this time period in 2016. The market has given back $7 billion.
However, many investors might have forgotten that this group has a long track record of outperforming in a rising interest rate environment. For example, it rose by 2% during the first three months following a 30 basis point hike in December 2015 and those gains were even higher after Federal Reserve officials raised rates again last year.
UMarketz broker says interest rates do not always lead to these declines and in fact, this is the first time such a high number of down days has happened.
Political & Promotional Headwinds
According to the UMarketz broker, industries that were already performing poorly due to political headwinds and limited expansion opportunities have only continued underperforming throughout the year. The analyst says some of these names include the U.S. steel and lumber industries as both have performed poorly due to foreign competition.
However, they also face pressure from rising prices which has made it harder for them to compete with global competitors and this was on full display last month when US Steel Corp laid-off employees at several facilities because product costs had risen too quickly.
Meanwhile, lumber stocks have also struggled due to rising import levels with what is being described as the worst news for the industry in 25 years when they see it pertains to clear-cutting regulations in Canada that are limiting exports into America. Nevertheless, UMarketz broker is arguing that investors should not be surprised if this sector rallies as it has under similar conditions in recent history.
The UMarketz broker warns that the warning signs are clear and investors need to know when it is time to sell their stocks before they lose too much money, especially in such volatile markets.
However, the UMarketz broker is telling investors to stay strong and not panic because the future for these companies still looks bright. All it will take is time, patience, and a little faith in order to get back on track again. The UMarketz broker vouchsafes that this wait should be well worth it considering how high dividends are along with future prospects given today’s valuations.