Many investors are likely frustrated with the market’s choppiness. I’m sorry to say that next year feels like it will be more of the same, and the market may even fall a fair amount.
I’m fairly bearish on the overall market because the economy just isn’t that hot. Gross domestic product growth is weak, we have 94 million people out of the workforce, and we’re seeing tons of debt being taken on at both the federal and individual level.
Some stock market sectors should do well, but I fear some are at higher risk than others, and I would stay away from them. So here are my thoughts on sectors to avoid next year. That means that if you have ETFs or mutual funds in these sectors, you may want to consider trimming them back, and aggressive investors may even want to short.
Use Discretion With Consumer Discretionary Stocks
While the most basic household items always need to be purchased, others do not. I think consumer discretionary is going to come under pressure next year, but primarily in general retailers like apparel, broad-line retailing, home improvement and specialized services.
So the first thing would be get rid of things similar to the Consumer Discretionary Select Sector SPDR ETF (NYSEArca: XLY). It’s not a perfect choice, because it has exposure to sectors I think will do well, like hotels, auto components and household durables. However, the holdings are rather small. So if you were to short it, you’d actually have an internal hedge with those holdings.
A similar move with similar hedging in place would be to sell or short the Market Vectors Retail ETF (NYSE MKT: RTH). The top 10 holdings account for 65% of the asset base, and Amazon.com (NASDAQ:AMZN) accounts for 15% on its own. A lot of the subsectors I mentioned are listed here, and I also think Amazon is a great company but terribly, terribly overvalued.
Trouble in Tech
I think technology in general will be in for a rough ride. Obviously, some tech is essential to daily life and won’t get hit as hard, but other areas should struggle. I’m thinking about things like the technology hardware and equipment subsector.
I think selling or shorting the SPDR S&P International Technology Sector ETF (NYSEArca: IPK) makes some sense here, as many of the holdings are also consumer in nature. All the foreign companies that make our TVs, phones, cameras, and so on, are included in here.
An Emerging Trend
I would stay far away from emerging markets. First of all, these countries are loaded with debt and some are even insolvent, like Greece. Second, many of the more far-flung countries like China have been making it increasingly difficult for U.S. companies to do business.
I would avoid the Middle East and Africa entirely. There is too much volatility in the former and the latter does not have the kinds of anti-corruption protections we have in place.
To that end, consider selling or shorting the S&P Emerging Markets Small Cap ETF (NYSEArca: EWX). The small-cap nature also gives you a leg up, because small caps are at least insulated from broader difficulties.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.