Sector Rotation: Conservative Investments are Outperforming

The S&P 500 index closed lower again today, but in our view, we are experiencing only a small correction so far:


The most important new development is the directional change of the long-term Treasury bonds yield index:


Lower interest rates and the flight to safe investments due to geopolitical risks are two factors that contribute to utilities outperforming most sectors:


Consumer staples, another defensive sector, is also making higher highs and higher lows:


The weakest sectors that investors should consider avoiding in the current market environment are energy, transportation and financials, especially banking:





Geopolitical Risks May Cause Flight to Safe Haven Investments

Increased tensions on the Korean peninsula and in Syria can adversely impact the already weakening stock market really.

In our view, an early warning sign is the sudden outperformance of safe haven investments, such as Treasury bonds and gold.

The chart below shows that the Spartan Long-Term Bond Fund (FLBIX) started moving higher already by breaking out from a six-month trading range:


The Fidelity Select Gold Fund (FSAGX) was the best-performing Fidelity fund today with a 2.63% gain, and may be on the verge of breaking the long-term downtrend line:





Large Price Drops of Some Fidelity Select Funds are Due to Capital Gains Distributions

Several Fidelity sector funds experienced large drops in their net asset values (NAVs) on Friday. The explanation is that Friday was the ex-dividend date for these funds.

For investors who chose to reinvest the distributions automatically, the value of their holdings will be readjusted on Monday. For investors who chose not to reinvest, their investment account will be credited with the distribution amount.

Here are a few examples of sector funds experiencing large price drops:




The simplest way to double check recent distributions is by going to the website directly. For example, here are the most recent capital gains distributions for the Fidelity Select Automotive Fund (FSAVX):




Best Income Funds for 2017

Improving U.S. economic conditions and the strengthening of the dollar resulted in higher interest rates in the last six months. The yield on the long-term Treasury bonds is slightly above 3% now:


As the consequence, bond funds investing in Treasuries did not perform well in the same period:


On the other hand, investors who were willing to take higher risks in search for higher income have been well rewarded.

For example, the Fidelity High Income Fund (SPHIX) invests in corporate bonds and it offers both a respectable 5.28% yield and the potential for strong appreciation of its Net Asset Value, should the U.S. economy continue to grow in 2017:


Another example is the Fidelity Real Estate Income Fund (FRIFX) with a current yield of 4.16%:


Investors who are interested in diversifying into international assets can also consider the Fidelity New Markets Income Fund (FNMIX) with a current yield of 5.42%. FNMIX holds the majority of its assets in debt securities of emerging market companies.




Conservative Investments Lead the Market in 2016

After high market volatility in 2015, it is not surprising to see that investors are favoring conservative investments in 2016. We’d like to highlight here a trio of conservative sector funds, which show improving relative strength compared to the S&P 500 index.

The Fidelity Select Utilities Fund (FSUTX) returned an impressive 14.5% in the last three months, surpassing the 2.77% return by the benchmark Fidelity Spartan 500 Index Fund (FUSEX) in the same period:


The Fidelity Select Telecomm Fund (FSTCX) is at a new all-time high level and returned 10.17% in the last three months:


The Fidelity Select Consumer Staples Fund (FDFAX) reached an all-time high too, and returned 6.32% in the last three months:


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Real Estate Funds at All-Time High Levels

A stealth rally is under way in real estate equity and income investments, while most of the financial media is focused on developments around oil and other natural resources.

The Fidelity Real Estate Portfolio Fund (FRESX) is now at a new all-time high level surpassing the previous high reached in January of 2015:


Our favorite investment in this space is the Fidelity Real Estate Income Fund (FRIFX) that is also at a new all-time high:


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Best Bond Funds for 2016

After the market turmoil in the second half of 2015, new trends have emerged in 2016. One of the important new trends is that the long-term Treasury yield index reversed direction and going lower:


Lower long-term interest rates coupled with the strengthening U.S. economy makes bond investments attractive again. The Fidelity U.S. Bond Index Portfolio Fund (FBIDX) is a great way to participate in the new investment environment, because FBIDX invests in both Treasury and corporate bonds.


One of our long-term favorites is the Spartan Municipal Bond Fund (FHIGX). This fund has been making steady gains since October 2015 and we believe that the improving economy should continue to strengthen the credit worthiness of issuers and increase demand for municipal bonds.


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