Key Sectors and Industries Stock Investors Should Know About

By Paul Mladjenovic

Here, you will find some sectors and industries that stock investors should take note of. Consider investing some of your stock portfolio in those that look promising (and, of course, avoid those that look problematic).

Many investors can benefit from a practice referred to as sector rotation. The idea is that you shift money from one sector to another based on current or expectant economic conditions. There are a number of variations of this concept, but in most cases, they follow some essential ideas.

Given today’s problematic economic conditions, sector rotation makes sense and is worth a look by long-term investors.

Real estate

Real estate is a key sector because it’s a cyclical bellwether industry — one that has a great effect on many other industries that may be dependent on it. Real estate is looked at as a key component of economic health because so many other industries — including building materials, mortgages, household appliances, and contract labor services — are tied to it. A booming real estate industry bodes well for much of the economy.

Housing starts are one way to measure real estate activity. This data is an important leading indicator of health in the industry. Housing starts indicate new construction, which means more business for related industries.

Keep an eye on the real estate industry for negative news that could be bearish for the economy and the stock market. Because real estate is purchased with mortgage money, investors and analysts watch the mortgage market for trouble signs such as rising delinquencies and foreclosures. These statistics serve as a warning for general economic weakness.

In recent years, the real estate mania hit its zenith during 2005–2006. A mania is typically the final (and craziest) part of a mature bull market. In a mania, the prices of the assets experiencing the bull market (such as stock or real estate) skyrocket to extreme levels, which excites more and more investors to jump in, causing prices to rise even further.

It gets to the point where seemingly everyone thinks that it’s easy to get rich by buying this particular asset, and almost no one notices that the market has become unsustainable. After prices are exhausted and start to level off, investor excitement dies down, and then investors try to exit by selling their holdings to realize some profit. As more and more sell off their holdings, demand decreases while supply increases. The mania dissipates, and the bear market appears. This is definitely what happened to real estate in 2007–2008, when the industry fell on hard times as the housing bubble popped.

The real estate industry first soared during 2000–2006 and then cratered during 2007–2012. The real estate industry is stabilizing after several very difficult years. The industry may very well start its path to normalization.

If you want to invest in real estate, start looking for companies that are showing consistent profits and taking advantage in a rebounding sector. Although the sector may not be out of the woods yet, the opportunities do outnumber the pitfalls.

Automotive

Cars are big-ticket items and are another barometer of people’s economic well-being — people buy new cars when they’re doing well financially. A rise in car sales is usually considered to be a positive indicator for the economy.

The automotive sector is still feeling its way. Although the government has used taxpayer funds to rescue some individual companies (such as General Motors), the automotive industry is still not on a healthy track despite the fact that it had record sales in 2015. The reason is that a huge percentage of those auto sales were due to subpar or subprime debt that was eerily similar to the subprime debt from the housing bubble.

Some of these auto loans were for 84 months (a seven-year auto loan!), which is a bad idea for a depreciating asset that requires substantial repairs after five years of wear and tear. In other words, expect problems for the auto industry during 2016–2017.

Computers and related electronics

In recent years, technology stocks have become very popular with investors. Indeed, technology is a great sector, and its impact on the economy’s present and future success can’t be underestimated. The share price of technology companies can rise substantially because investors buy shares based on expectations — today’s untested, unproven companies may become the Googles and Apples of tomorrow.

With the success of Apple as it forges a path in the world of personal electronics, this area will continue to show growth as worldwide consumer demand continues to show strength. Don’t lose sight of the fundamentals as this industry continues to mature.

In spite of the sector’s potential, companies can still fail if customers don’t embrace their products. Even in technology stocks, you still must apply the rules and guidelines about financially successful companies. Pick the best in a growing industry and you’ll succeed over the long haul.

Financials

Banking and financial services are intrinsic parts of any economy. Debt is the most important sign of this industry for investors. If a company’s debt is growing faster than the economy, you need to watch how that debt impacts stocks and mutual funds. If debt gets out of control, it can be disastrous for the economy.

As Doug Noland points out (he writes the Credit Bubble Bulletin), the amount of debt and debt-related securities recently reached historic and troublesome levels. This trend means that many financial stocks are at risk if a recession hits anytime soon.

Financial stocks have emerged from a tough period of troubles in subprime debt and related difficulties. Because this is an area susceptible to debt troubles, problems will persist during 2016–2017. Investors should be very selective in this industry and should embrace only those lenders that are conservative in their balance sheet and are generally avoiding overexposure in areas such as international finance and derivatives.