These Investments Stand the Test of TIME [S&P 500(INDEXSP:.INX), Materials Select Sector SPDR(NYSEARCA:XLB), Energy Select Sector SPDR (ETF)(NYSEARCA:XLE)]

December 9, 2014 12:20pm NYSE:SPY NYSE:XLB

time1In March, I wrote about four sectors that usually do well during periods of economic growth. The acronym TIME is an easy way to remember them. The sectors are technology, industrials, materials and energy. All four sectors tend to outperform the broader market over long periods of time, though of course any of them could


underperform in a given year. In fact, in the volatile market we’ve had in 2014, only the technology sector, represented by the Technology SPDR (ETF)(NYSEARCA:XLK), has outgained the S&P 500(INDEXSP:.INX) (16.6% to 11.6%).

The average gain of the four TIME sectors year-to-date is 8.9%. But recently I decided to see how well these sectors have done over longer periods, including periods of economic contraction.

For the Long Term

Below is a five-year chart of the same five indexes.

You’ll notice that over the last five years, industrials and technology outperformed the S&P 500(INDEXSP:.INX), while energy (NYSEARCA:XLE) and materials (NYSEARCA:XLB) underperformed the index. The average gain was 78.2%, while the gain for the S&P 500 was 89.1%.

Now let’s look at the 10-year performance of the TIME sectors.

Over the last 10 years, the only sector to underperform the S&P 500(INDEXSP:.INX) was the materials sector (NYSEARCA:XLB), and only by a small percentage. Assuming equal weighting in all four sectors, your average gain would have been 101.2%, handily beating the 76.3% gain of the S&P 500 over the same period. Also, take note of energy, which has nearly doubled the S&P over the past 10 years.

Let’s assume you’re one of those “buy and hold forever” investors like Warren Buffett. Below is a chart going all the way back to 1998.

 

Investing in my TIME sectors would have netted 42.4% greater gains over the S&P 500(INDEXSP:.INX) during the same time frame. When we average our gains together, we come up with 149.8%. Compare that to the S&P 500, which is up 107.4% over the same period.

And look at energy: It outperformed the next closest sector by almost 2-to-1. It nearly tripled the S&P.

Cheap energy is the catalyst that drives economic growth. And that growth is likely to continue.

The United States has the cheapest natural gas prices in the world – less than half the price in Europe, one-third the price in China and one-quarter the price in Japan.

That’s one reason why I’m bullish on the prospects of each of the TIME sectors over the next five years. Cheap energy is driving the rebirth of our manufacturing and industrialization sectors. Steel and aluminum manufacturers, as well as others whose processes consume a lot of energy, are coming back from overseas.

Plastics and fertilizer companies that use natural gas as a feedstock are also relocating here.

Last month, the Boston Consulting Group (BCG) released its annual survey of senior executives at large manufacturing companies. An incredible 54% said they are considering reshoring their operations to the U.S.

That’s 24% higher than last year’s survey. Respondents indicated the U.S. had even surpassed Mexico as a favorable location for the American market.

All this reshoring means more manufacturing jobs, right when the U.S. sorely needs them. BCG estimates reshoring will create 600,000 to 1 million new manufacturing jobs by 2020.

And it’s not just U.S.-based manufacturers returning operations to domestic shores. Foreign companies are coming too. Even Chinese manufacturing firms are planning manufacturing operations here in the U.S.

It’s part of the Rust Belt Revival that I’ve written about previously.

The reason is that energy is every manufacturer’s biggest expense. Manufacturers spend more on energy than on labor. Besides, U.S. and Chinese labor costs are roughly equal now.

In addition to cheap energy, companies are finding that production costs are lower and they have better control over things like product quality, delivery and time-to-market.

With cheap oil prices here in the U.S., freight costs will soon be cheaper than anywhere else in the world. Gasoline and diesel prices are dropping to levels not seen in several years. That will be a boon to manufacturers too.

And as for technology, my favorite saying is “technology marches on,” and new technology is making inroads into nearly every field imaginable.

I expect all four TIME sectors to outperform the market over the next five years.

Good investing,

by David Fessler, Energy & Infrastructure Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.


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