Technology stocks are having a particularly rough start in 2022. The tech-centric Nasdaq is down 9.1% year to date while the Dow is down a more modest 2.3%.
High-growth tech stocks typically have lofty earnings expectations built into them. So when investors expect rates to rise and demand to slow, these stocks get hit the hardest.
Investors are also concerned about whether businesses will start to curtail their technological investments after spending big money on upgrades during the pandemic.
On that front, DeSpirito believes the fear is overblown.
“We believe spending will continue as companies need to keep both home and office systems running in the new hybrid work environment.”
DeSpirito says companies will be prompted to spend on efficiency-enhancing technology due to rising labor costs.
Investors should also pay attention to the 5G rollout, as telecom giants continue to invest heavily in cellular network upgrades.
If you don’t want to pick individual winners and losers, an ETF like the Defiance Next Gen Connectivity ETF (FIVG) provides easy access to a diversified portfolio of 5G stocks.
Energy investors had a big year in 2021, with the Energy Select Sector SPDR ETF (XLE) having returned a whopping 53%.
While past performance is no guarantee of future results, the momentum in energy stocks has continued in 2022. XLE is already up another 20.5% year to date.
DeSpirito remains bullish on energy stocks.
“There is still a significant need for traditional energy as the world transitions to cleaner solutions, and those needs were magnified as the world reopened in the past year,” he wrote. “In this interim period ― amid robust demand, hesitancy to increase supply, and renewables still far from filling the gap ― we can expect higher prices to linger.”
Oil prices remain strong. WTI crude has risen 19% in 2022. And DeSpirito expects exploration and production companies to capitalize.
The big producers are already market darlings. ExxonMobil is up roughly 25% year to date while ConocoPhillips shares have surged nearly 30%.
DeSpirito likes financials because the sector offers growth at a reasonable price right now.
“The need for excess return in a lower-return world sets the stage for growth in alternative asset managers,” he wrote. “Yet current pricing suggests markets are skeptical, with some of these high-growth-potential alternative managers priced like value stocks.”
Among companies in the financial sector, DeSpirito likes banks the most because of how well they are positioned for the rising interest rate environment.
As interest rates go up, banks’ net interest spread — the difference between the interest they pay to depositors and the interest they earn from loans — typically widens.
If the Fed does indeed tighten up its monetary policy, banks can look forward to improving profitability.
Investors can tap into the sector by owning shares of big individual banks like JPMorgan, Bank of America and Citigroup. Of course, a fund like the SPDR S&P Bank ETF provides convenient access to a portfolio of bank stocks.
Healthcare serves as a classic example of a defensive sector thanks to its lack of correlation with the ups and downs of the economy.
DeSpirito believes quality stocks in the sector can add a “dose of portfolio resilience.”
Healthcare contains several different industries. Right now, DeSpirito thinks the medical device industry is being overlooked by investors.
“Earnings for many of these companies are modestly depressed as elective procedures had to be delayed. As these come back online, we see plenty of ground to be made up.”
Average investors might find it difficult to pick out specific medical device companies. But ETFs such as the iShares U.S. Medical Devices ETF (IHI) and SPDR S&P Health Care Equipment ETF (XHE) offer diversified ways to invest in the group.
If you’re after more broad exposure to the healthcare sector, an ETF like the Health Care Select Sector SPDR Fund (XLV) should do the trick.
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