The best and worst sectors in 2013 can be revealed by making some basic assumptions about market and economic assumptions. Of course, building a portfolio is a personal matter with specific investment objectives and time horizons to consider but there are some wise moves to make now to help maximize returns while keeping market risk to reasonable levels.
Economic and Market Outlook for 2013
Looking back at My Where to Invest 2012-Sectors article from last year, you can see that the forecast was not bright but relatively easy to foresee:
Not even the most optimistic US economist projects the unemployment picture to improve significantly, the do-nothing US Congress will surely continue to hold the economy hostage and world economies will not improve any time soon.
Not surprisingly, my 2012 economic assumptions were correct: 2012 ended with Congress pushing the US to the edge of the fiscal cliff while Europe re-entered recession. The prudent investor may expect more of the same in 2013: Continued lack of confidence in Washington's ability to cure what ails the US economy and more weakness overseas that may be difficult or impossible to improve any time soon. Add on top of this, the current bull market passed the average duration of 3.5 years in 2012. This does not signal a new bear market in 2013 but it does mean the markets positive run is nearing its end.
Best and Worst Stock Sectors for 2013
Now we have our assumptions from which to base our selection of best and worst sectors of 2013: An slow economy and aging bull market that are likely closer to the end of their respective cycles than the beginning. Most investors, especially long-term investors who employ some form of tactical asset allocation, will want to continue stepping way from riskier sectors that do better in growth periods and step toward more defensive sectors that can do relatively well in slow growth and recessionary periods.
- Sectors to Avoid in 2013: Based upon our slowing growth/aging bull assumptions, you may want to avoid sectors that do best in the early periods of economic growth, such as technology, transportation, and financials. You may even want to begin taking steps away from sectors that tend do well in latter stages of economic growth, such as precious metals and energy.
- Sectors to Consider in 2013: Continuing upon the above assumptions, you may want to take steps toward sectors that tend to do better in the early recession/early bear market period such as health care, consumer non-cyclicals and utilities. For a value play and to take advantage of what appears to be increasing momentum in the housing sector, you may consider real estate as a fourth sector for 2013.
This list is similar to my 2012 list but for good reason: Our attempt is not to time the market neatly over calendar-year periods but to make small, yet deliberate and tactical moves with one eye on the short-term (1-year or less) and another eye on the mid-to-long-term (1-3 years to 10-year). In reflection, the idea to stick with health, utilities and consumer non-cyclicals (with the addition of real estate in 2013) appears to make sense: The top 3 sectors, from best to worst, in 2012 (as of the end of the 3rd quarter) are Health, Consumer Cyclical, and Financial. Technology was fourth but appears to be trending downward now and Real Estate was around the middle of the list among 11 sectors in 2012 but may be on its way higher in 2013. We may be seeing a rotation out of growth cycle sectors into more of a defensive, recessionary, bear market cycle.
More reasoning for choosing the health, utilities, consumer non-cyclical and real estate sectors for 2013, is that two of them (utilities and real estate) pay among the highest dividends of all sectors and can add value and alternatives to fixed income in 2013. Adding more value for strong diversity is that these sectors are considered "defensive sectors" because they do not move in lock-step with the S&P 500 Index.
Best Sector Mutual Fund and ETF Examples for 2013
- Health: T. Rowe Price Health Sciences (PRHSX) mutual fund or Health Care Select Sector SPDR (XLV) ETF.
- Utilities: Utilities Select Sector SPDR (XLU) ETF
- Consumer Non-Cyclical (aka Consumer Staples or Consumer Defensive): Vanguard Consumer Staples (VDC) ETF
- Real Estate: Third Avenue Real Estate Value (TVRVX) mutual fund or iShares Cohen & Steers Realty Majors (ICF) ETF
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.