The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns is an excellent reference aimed at reducing investment sector risk in favor of long-term success in the market. Important conclusions are advanced by the author—namely, that the stock market can advance strongly through a combination of higher earnings and low starting Price/Earnings ratios. During recessions, earnings can collapse leading to a higher Price/Earnings ratio based on trailing earnings.
The average bond total return since 1930 is just under 6%. Bond returns are most dependent upon the starting interest rate and the changes in general interest rates over time. When interest rates increase, the value of bonds go down and the converse. In the past 13 years, utilities, energy and health care have provided the most consistent returns in positive territory. Technology has been both the highest performer and worst performing sector simultaneously.
Basic materials, technology and industrial investments have performed best in a recessionary environment where the economy has retracted with reduced interest rates and a bottoming of consumer confidence. Coming out of a recession, Industrials and technology have lead the way out of a recession with consumer and energy sectors picking up later on in the recovery. From 1957 to 2005, consumer staples and health care sectors have performed best yielding at about 16%. Financials lagged behind with an 11% return.
Proponents of health care investments support their position by saying that the global population is aging, medical technology continues to advance incrementally, emerging market incomes are on the rise, and investment returns have been relatively stable--even in recessions. Pharma spending is the highest in Greece, Canada, France, Ireland, and Belgium relative to the GDP/Capita. Conversely, Pharma spending is lowest in countries like New Zealand, Poland, Denmark, Norway, the UK and the Czech Republic.