As December unfolds, the current state of the market is one of the more difficult ones we’ve seen in a while for managing risk.
Some areas of the economy continue to perform well.
However, there are market risks: Some macroeconomic data have been soft.
Then there’s the uncertainty about the impact of the US Federal Reserve’s shift toward a tighter monetary policy.
There’s considerable downside risk during a time of year when the stock market historically tends to perform well.
So, we are in the market but with a cautious eye to exit quickly if price deteriorates.
The three key sectors we’re focusing on this month are technology, industrials and insurance.
This is the area that looks the strongest to us right now. Whether it’s the Internet, semiconductors, software or hardware – every area of the technology space has been among the best performers over the last 3 months.
An investment we currently like is the SPDR Technology Select Sector fund (XLK), which is a broad representation of the technology sector.
Technology has become so integral to our everyday lives and each year contributes to so much of the growth of our economy.
In our opinion, we believe these are the companies people will more likely want to own regardless of the state of the economy.
Many of the larger holdings in the industrials sector are in manufacturing, defense/aerospace and transportation.
In particular, we think that conditions could favor the defense and transportation elements of this sector.
The strong dollar and weak oil prices tend to bolster airlines because the strong dollar makes it more affordable for American to travel internationally and the low fuel costs helps improve the profit margins of the airlines.
The increasing conflict in the Middle East and other parts of the world makes it likely that companies in the defense sector will see increases in demand over the foreseeable future.
Going into December, we also like the insurance sector because of the potential for rising interest rates and rising insurance premiums.
Rising premiums will increase the amount of money coming in, and the possibility of increasing interest rates could increase the amount they are able to earn on those new funds that come in.
Photo Credit: Day Donaldson via Flickr Creative Commons
The investments are presented for discussion purposes only and are not a reliable indicator of the performance or investment profile of any composite or client account. Further, the reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.