Sectors Affected by an Extended Rally

Going Forward – Sectors to Consider!

by Ian Harvey

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April 03, 2013

Introduction

Experts aren't anticipating a spring slide in the stock market for a fourth year in a row.

In fact, even though the Dow Jones Industrial Average (DJI) and the Standard & Poor's 500 Index (SPX) are at all-time highs, stocks are not at a peak yet, stocks are still cheaper than they were at the peaks in 2000 and 2007.

Since March 2009, when the index reached its lowest level since 1996, the S&P 500 has climbed more than 131%, and is up 10% year-to-date. Large Wall Street firms have grown increasingly bullish, a trend that’s even turned some notable bears.

Stocks, bond yields and oil prices have been climbing and now gold is trying to catch-up.

What may happen next with these major asset classes if the bull rally continues overcoming the hurdles of April?


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Bond Sector

The 10-year Treasury yield has crept back up to around 2% from its record low of 1.4% last July, but don't expect yields to surge anytime soon.

As long the Federal Reserve continues to buy Treasuries -- which it will likely do until at least the middle of this year -- yields will remain under pressure. (Bond rates fall when prices rise.)

And even when the Fed does decide to end its bond buying program, it will likely do so gradually rather than suddenly.

A year-end rate forecast of between 2.25% and 2.5% for the 10-year Treasury is expected but the move will be "slow and erratic."

With yields on the rise, Treasuries are unattractive and therefore it is best to focus bond portfolios on high yield debt, bank loans and emerging market debt.


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Energy Sector

So far this year, U.S. oil prices have gained 3% on hopes the economic recovery will accelerate in the second half of 2013. But the outlook remains uncertain as the industry moves to unlock a glut of crude stockpiled around Cushing, Okla.

Analysts at Goldman Sachs say oil could rally in the short run, but expect prices to be around $97 a barrel in 12 months -- not much higher than current levels. Oil prices have also been held back by waning demand in China and other emerging markets. The recession in Europe has not helped matters either.

Meanwhile, natural gas prices have jumped 19% this year on colder-than-expected winter temperatures. The rebound comes after a five-year sell-off. Looking ahead, natural gas prices should continue to rise over the next few years as more coal-fired power plants are retired and exports to Mexico increase, according to the Goldman analysts.

These trends should ultimately reduce the surplus of natural gas in the United States, the analysts added. But they also pointed out that the "massive" potential for more shale gas production in the U.S. should boost supplies and limit how high prices can go.


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Gold Sector

Gold bugs have had a shaky start to 2013, but things may be turning around for the precious metal.

While prices are down more than 3% so far this year, some analysts predict gold prices could top off at $1,800 an ounce by year end. That's nearly 13% above current levels.

The driver behind this increase is central banks launching -- or in the case of the Federal Reserve, continuing -- stimulus programs.

Just look the Bank of Japan. Its aggressive moves weakened the yen enough to spark currency war talk and inflation fears.

That could boost gold, used as a hedge against currency depreciation. Also, Cyprus has raised worries about the safety of bank deposits so investors may turn toward gold, a tangible asset, as a safety play.

Investors are looking at gold not just as a hedge against inflation, but as a way to gain an extra edge in their portfolios.


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