The Island of Misfit Sectors

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What is more disappointing than a toy train with square wheels, a spotted elephant or a Charlie-In-the-Box? The energy and financial sectors. They have been disappointing investors all year, both down more than 12% year-to-date despite leading the charge in earnings growth. Energy earnings were up 120% in the third quarter and financials were up 36%. Looking ahead, fourth quarter earnings are expected to grow another 86% for the energy and 20% for the financials. So why are investors so reluctant to reward these sectors?

The volatility in oil prices with a spike in prices this year followed by a plunge, combined with geopolitical tensions, oversupply worries and potential demand slowdown because of China’s economic woes have been driving back investors. Yet, the average price of oil over the last 30 years is $43/ barrel, which is lower than the price today. On the other hand, the financial sector is on the front line of global growth concerns. The yield curve is often blamed for its price underperformance but most of these companies are making money even with a flatter yield curve. Investors are worried about the slowing economic growth and the heightened risk of recession. Growth has slowed but it is still above trend. Recession still looks distant. According to a CNBC survey released today, consumer holiday spending is surging. Despite a drop in optimism, consumers are planning on spending an average of $1100, up from $907 last year. This is the first time this survey reported an anticipated spending amount above $1000. Still, the lack of enthusiasm around energy and financials have driven P/E s down to naughty list levels of 13.4 and 10.7 times, respectively.

Please see the Voya Global Perspectives 2019 Forecast – The Storm Before The Calm.

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