The U.S. equity market experienced a 10% drawdown in February, breaking into an official correction. If history has anything to say about it, the stock market and related exchange traded funds may enjoy a period of strong recovery in the following months.
Since 1960, there have been 10 corrections in the U.S. stock market as steep and fast as the pullback experienced in February, which saw a 10% plunge in 9 sessions. However, stocks have historically performed well after such a correction, with positive 12-month returns following 8 of the 10 corrections on an average gain of 17%, Fidelity Sector Strategist Denise Chisholm said in a research note.
“Historically, stocks have done well, on average, after pullbacks,” Chisholm said.
Rising interest rates is also a concern that many investors are trying to wrap their heads around, but it may be a bullish signal. Since 1955, the market has had a better odds of an advance when rates were rising.
“The reason for that seems to be that rates tend to rise when the economy is healthy, and a healthy economy is generally good for the market. So, historically at least, increasing interest rates do not by themselves indicate weakness in the stock market,” Chisholm said.
Furthermore, many corporations remain relatively early in their profit cycle, which may continue to strengthen cyclical sectors.
Chisholm has signed out four sectors that have fundamental drivers that historically have been associated with strong relative returns, including Financials for the potential loan growth, Technology as leading indicators suggest expanding margins, Industrials for the likely increases in investment spending, and Consumer Discretionary due to tax cuts.
ETF investors interested in gaining exposure to individual sectors or execute a sector rotation strategy also have a number of options available. For instance, Fidelity’s sector ETFs include:
- Fidelity MSCI Consumer Discretionary Index (NYSEArca: FDIS)
- Fidelity MSCI Consumer Staples Index ETF (NYSEArca: FSTA)
- Fidelity MSCI Energy Index ETF (NYSEArca: FENY)
- Fidelity MSCI Financials Index ETF (NYSEArca: FNCL)
- Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC)
- Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU)
- Fidelity MSCI Information Technology Index ETF (NYSEArca: FTEC)
- Fidelity MSCI Materials Index ETF (NYSEArca: FMAT)
- Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM)
- Fidelity MSCI Utilities Index ETF (NYSEArca: FUTY)
- Fidelity MSCI Real Estate Index ETF (NYSEArca: FREL)
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