The market didn’t like what the Fed said, which left stock holders scrambling for the exits.
Some sectors took a greater hit than others, but did the right sectors take the brunt of the selling?
Don’t discount utilities
The threat of rate hikes had the most impact on interest rate sensitive defensive sectors, like utilities in particular.
The Utilities SPDR (ETF) (NYSEARCA:XLU) quickly dropped below what had looked a turnaround opportunity in June. The sector leaders, CenterPoint Energy, Inc. (NYSE:CNP) and EQT, had a mixed response, with the latter holding up better, although both have merits which I detailed here.
While a slowdown in the financial stimulus program will have an impact on the utility business, in terms of investing, this a sector which has been struggling since April’s highs, not since Wednesday’s announcement. While I’m not one to jump in with two feet (I would like to see the overall market come back more before I would be a concerted buyer), utility stocks – and the SPDR Exchange Traded Fund (ETF) in particular – are offering good value: high dividend yields, low historic interest rates, competitive Price/Earnings (P/E) ratios, and a tepid economy offer an environment within which utility stocks can blossom.
Other sectors are looking less attractive.
Technology and semiconductor’s look rich
A drop in Fed stimulus will pressure the still weak economy, and this will hurt cyclical sectors.
Technology is vulnerable because of falling demand for copper, but the effects of this have been hidden by the gains posted in the semiconductor sector. Copper prices have been steadily falling since February – part of larger decline dating to the 2011 high. However, the primary consumer of copper, the semiconductor sector, has been heading in the opposite direction. The Market Vectors Semiconductor ETF (MUTF:SMH) had closely tracked copper prices from the 2009 low, but April saw this relationship change, with the ETF running higher as copper prices fell. The key reason for this was Intel Corporation (NASDAQ:INTC), which accounts for 17% of the ETF’s price action, which saw higher prices as buyers sought a silver lining in their earnings miss.
Intel outshines Apple
It probably helped Intel Corporation (NASDAQ:INTC) that Apple Inc. (NASDAQ:AAPL), at the time, was making new lows: ‘outperforming’ Apple Inc. (NASDAQ:AAPL) was seen as something good. So Intel’s mediocre resilience, which it has endured for the best part of 10 years, was viewed as some form of positive. Intel Corporation (NASDAQ:INTC)’s earnings have been steadily declining as the PC business continues to lose ground to the tablet sector. Number crunchers have squeezed value from the metrics, boosted by Intel’s share buyback scheme, but there has been little from the company to suggest it deserves to be where it is.
Its earnings history has been a steady grind lower, and its most recent earnings release proved that even this may be too optimistic.There is an acknowledgement from the new CEO, Brian Krzanich, to become more responsive to its existing weakness in the smartphone and tablet market. But it will take time for Intel Corporation (NASDAQ:INTC) to claw back the ground lost to its rivals in this regard. In the meantime Intel investors seem happy to buy into future potential with a fresh face at the helm, rather than dwell on what’s past.