Things look rough out there, but certain market sectors are made for these conditions.
On Friday, I explained how inflation was wrecking growth stocks and the tech sector in particular.
While the S&P 500 has reentered bear market territory after sinking 20% from its 52-week high as I write this, the Technology Select Sector SPDR Fund (NYSE: XLK) is down almost 30%!
You can see how the bearish trend has hit XLK in 2022 below.
Many of the high-profile tech names that led the last bull market are down much more than that.
This doesn’t mean tech is dead forever. I may find some fantastic opportunities to trade tech stocks before this year is over.
Moments of extreme sentiment often create fantastic chances to take the other side of the trade. My readers in Max Profit Alert have taken advantage of this year’s volatility to score some fantastic profits.
All the same, the sector faces headwinds, and the 2022 trend is bearish as we close in on the final quarter of the year.
It’s not just the tech sector. Of the 11 major S&P 500 sectors, only two are in buy-qualified uptrends: energy and utilities.
You can see how that’s played out in the overall market below.
A deeper look reveals what’s going on.
Why Energy and Utilities Work in 2022’s Bear Market
The energy and utility sectors don’t have much in common at first glance.
One is an ultra-defensive sector. The other is cyclical and tied to the health of the economy.
But they do have one tie that binds.
Both boast high yields compared to the nine other sectors within the S&P 500. The Utilities Select Sector SPDR Fund (NYSE: XLU) has a dividend yield of just below 3%. The Energy Select Sector SPDR Fund (NYSE: XLE) yields 3.5%. As a comparison, the S&P 500 yields a paltry 1.6%.
This ties back to what I wrote about on Friday.
Inflation penalizes growth stocks. As an investor, you buy these companies because you expect high future earnings to pay you back many times over. But those future earnings are worth a lot less in today’s dollars when discounted at the higher interest rates used to combat high inflation.
During times of high inflation, you should be more interested in results today. You want quality companies generating high margins in the here and now. A bird in hand is worth two in the bush, as the old saying goes.
Dividends Play a Part
Dividends are also part of that story. A dividend represents instant gratification (or as close as you can get without selling the asset) for the stock’s shareholders. Investors like you and me don’t have to wait years for a payoff. We can get it much sooner — and in cold hard cash.
It goes deeper than that.
When the market gets rocky, investors shift to low-volatility stocks. Companies that offer higher yields often fall into that category.
It’s part of the reason I track volatility as one of the six primary factors in my Stock Power Ratings.
I was discussing this with my friend and colleague Charles Sizemore. Charles is our “income guy” and has always made dividends a major focus of his investing.
In the September issue of Green Zone Fortunes, our premium stock research service, Charles recommends a low-volatility energy stock that is crushing the market this year.
It also pays a monster 7% yield and — perhaps even better — the company has increased its payout for 24 consecutive years and shows no sign of slowing down.
To join Green Zone Fortunes and gain access to Charles’ high-conviction dividend play, along with a handful of other top income plays to start — or bolster — your dividend portfolio, click here for all the details you need.
To good profits,
Adam O’Dell
Chief Investment Strategist