How To Invest In The Right Sectors

A sector is simply a fancy term for what business a company is in. Traditionally these were: “manufacturing”, “retail,” “energy/fuel”, “banking/financial”, “pharmaceutical”, “telecommunications” and “transportation.” More recently the “internet”, “high-tech”, and “bio-chemical” sectors have been dubbed the “New Economy.” In all, analysts have identified 200 different sectors. Some are subcategories of manufacturing, like “automotive”, others are new, like “genetic engineering”, or unique like “entertainment.” Categories can also disappear.

It’s easy to understand that sectors become hot and cold depending on the economics of the time. For example, at the turn of the century the Transportation Index was as important as the DOW is today. Now, the tech indexes may replace the DOW as the bell weather of our economy.

So of all the sectors, which ones will do the best right now, and why? In reality, simple logic gives us the answer.

When interest rates rise, interest rate sensitive stocks lose.

Profits in manufacturing, retail and other sectors that rely on borrowing atrophy in a rising rate environment. Banking and credit can also suffer when institutions must pay more to depositors and charge more to borrowers, costing money and driving customers away, respectively.

New and more speculative stocks are relatively unaffected by rate increases.

Tech, telecommunications and bio-tech sectors are bought for their growth potential. Capitalization often comes from venture capital, not debt. So, too, their investors are relatively insensitive to rates, compared to the investors in the traditional sectors.

DOW investors are likely to own established companies that make steady distributions of dividends. When rates rise they flee the market and secure guaranteed interest rates at the bank. For them, stocks and bonds are in competition as income producers. Investors that seek high growth ignore quarter point rate hikes. They stay put with their tech portfolios.

The strength of the dollar effects sectors, and in turn is effected by rates.

Inflation, a dollar that buys less in comparison to other currencies, is bad for multi-national companies. Most of our “New Economy” industries have worldwide reach. If inflation weakens the dollar they will be hurt.

For, now, they are safe. High rates curtail inflation, by making run away growth too expensive (borrowing-to-grow costs too much). By strengthening the dollar through high rates, which in turn keeps inflation in check, multi-nationals and especially the “New Economy” sectors benefit.

Last but not least, sectors respond differently to the price of fuel.

Fuel prices are high, creating trouble for manufacturing, construction and retail services. High -tech sectors are far less sensitive to these prices. In fact, because investor psychology is one of growth and speculation, prices in the “New Economy” are less sensitive to all the broad economic indicators, like unemployment, housing starts, and cost of living.

While not bullet proof, high-tech, telecommunication, bio-tech and their permutations are certainly the sectors to concentrate on, today. And they will remain in the forefront for decades to come.

To capitalize on the new trends, buy managed funds in these top sectors. Move money away from DOW and S&P indexes. Choose individual stocks in the “Old” economy for their low debt and high earnings. You can’t lose with a good company, regardless of sector. And it’s prudent to buy a few bargains in the out of favor sectors. They will have their day again.