(The opinions expressed here are those of the author, a columnist for Reuters)
By John Wasik
CHICAGO, July 28 (Reuters) - With a relatively robust first half for the U.S. stock market in the rear-view mirror, can you expect hot sectors to continue their climb for the rest of this year?
The answer is “yes”, assuming the news is generally positive, and barring any nasty geopolitical or economic surprises. Although there are a few high-glamour stocks leading the way, several sectors are relative dullards, yet still worth holding.
One of the biggest winners in the first half were aluminum stocks, up 55 percent through July 18, according to Standard & Poor‘s. While hardly on anybody’s list of sexy holdings, aluminum is a basic metal widely used in vehicles, appliances and aircraft.
You can find one of the industry’s leading aluminum producers, Alcoa Inc, in the Vanguard Materials Fund ETF . The Vanguard fund, charging 0.14 percent for annual management expenses, also includes stakes in chemical, paper and steel companies such as Monsanto Co, Dow Chemical Co and DuPont & Co. As well as aluminum, other basic materials stocks such as these will do well if the general economy and manufacturing continue to ascend.
The Vanguard fund is up nearly 25 percent for the 12 months through July 25 and serves as a bellwether for industrial production, which shows the relative health of the economy. That compares with a 20 percent gain for the broader S&P 500 index for the same period.
One of the least-efficient ways to hold aluminum is through an exchange-traded fund such as PowerShares DB Base Metals ETF , which holds about a third of its portfolio in futures contracts in aluminum, bets on the future price of the metal. The fund is only up about 8 percent for the 12 months through July 25 and charges a hefty 0.75 percent annual management fee.
And even harder-charging sector has been semiconductor equipment and manufacturing, which are basic components in the information age. The equipment and manufacturing groups are up 27 percent and 23 percent, respectively, in 2014 through July 18, according to S&P.
An exchange-traded fund such as the Market Vectors Semiconductor ETF, which charges 0.35 percent in annual management fees, is one way to hold this sector. It owns stocks such as Intel Corp, Taiwan Semiconductor Manufacturing Co and ASML Holding NV. The fund has gained 30 percent for the 12 months through July 25.
An alternative to the Market Vectors fund is the slightly better-performing iShares PHLX Semiconductor ETF, which is up 34 percent for the year through July 25. It holds many of the same companies as the Market Vectors fund.
Although there may be enough momentum to push the first half’s hot sectors to further gains in the second half, nothing is guaranteed. Subsectors - particularly in commodities and semiconductors - are notoriously volatile. At any hint of a slowdown in economic growth or demand, institutions sell them off.
If you want to be more defensive, that is more insulated against selloff pressures, consider the traditional fallback sectors of energy, healthcare and utilities, which grew 11 percent (for energy and healthcare) and 12 percent, respectively, for the year through July 18.
What will drive U.S. stock prices, outside of broader economic trends, are earnings. To date, the outlook has been sanguine. In a recent blog post, Ed Yardeni, of Yardeni Research, made the following point: “With the exception of emerging markets, the U.S. stands out as having one of the best-looking forward revenues profiles among the various major global MSCI composites,” he said.
“It has the best profile for forward earnings. The U.S. forward profit margin is at a record high, yet still trending higher.”
This isn't to say that tensions in the Middle East, rising oil prices or interest rates won't sway the market's mood. These gremlins are worth watching. But in the interim, keep an eye on corporate earnings reports. They mostly reflect the rising tide of the global economy. (Follow us @ReutersMoney or here Editing by Lauren Young; and Peter Galloway)