Although the Fed raised rates three times in 2017, financials weakened into June before recovering. Deregulation and/or rising credit growth should lift the sector in 2018. On relative terms, it remains one of the best bargains in the market.
Consumer discretionary outperformed the S&P 500 Index for seven straight years before correcting in 2016 and 2017. Shares of XLY have climbed from a dividend-adjusted $15 in 2009 to a new all-time high of $100 today. Subsectors like physical retail have suffered, but Amazon (AMZN) offset some last year’s weakness. It is now the largest stock at 16.8 percent of assets.
Industrials have been in a long-term uptrend versus the broader market, despite a relative valuation trading range since the start of 2011. A substantial drop in General Electric (GE) last year weighed on the sector. Pro-manufacturing policies from the Trump administration are the biggest potential catalyst for this sector.
The materials sector was strong in 2017, but it hasn’t really outperformed the market since it bottomed in early 2016. Like energy, it sits at a relative price similar to the early 2000s. Materials will likely move with energy.