How To Protect Yourself From The Two Biggest Threats To Markets Right Now

How To Protect Yourself From The Two Biggest Threats To Markets Right Now
Stéphane Renevier, CFA

almost 2 years ago1 min

If you look at their price-to-earnings ratios, IT, consumer discretionary, utilities, and communication services stocks are relatively expensive now compared to the last ten years.

Energy, financials, and materials stocks, on the other hand, are relatively cheap. That’s interesting: the IT and consumer discretionary sectors have been hammered this year, falling 17% each, while energy and gold mining have had a big rally – up 30% and 15% respectively. What does this all mean?

Even though IT and consumer discretionary have taken a beating, the sectors are actually still expensive. And despite the rally in energy and gold mining, those sectors are still cheap. So trends we’ve seen this year might have further to run yet. What’s more, the sectors most exposed to interest rate and inflation risks – namely tech, utilities, and consumer discretionary stocks – are also the most expensive ones, while the sectors that should perform better in those scenarios – financials, materials, and energy stocks – are the least. And this presents an opportunity.

You could protect yourself from inflation and interest rate risks – two of the biggest threats to markets right now – by shorting sectors like tech, consumer discretionary, and utilities and going long on sectors like energy, financials, and materials. You’d be benefiting from a higher margin of safety too, by betting against expensive stocks and on cheaper ones. Oh and given recent price performance, momentum would also be on your side.

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