👉️ Goldman Sachs: predicts a 3% annualized return for the S&P 500 over the next decade

👉️ Sector Rotation Strategy: What is it and how can you make money from it?

👉️ Betterment: Build wealth with automated investing, earn more on your cash with variable 4.50% APY

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The S&P 500 has seen impressive gains: 23% over the past year, 93% over five years, and 200% over the last decade, totalling over 600% since March 2009.

But here’s the kicker…

Goldman Sachs doesn’t think this will continue.

The firm predicts just a 3% annualized return for the S&P 500 over the next decade.

While it’s not negative, this equates to only 1% in real terms and ranks in the seventh percentile for 10-year returns since 1930.

If accurate, it would fall well below the 13% annualized return of the S&P 500 over the last decade.

Although this is just a forecast, it’s worth noting that David Kostin, Goldman’s US equity strategist, previously predicted a 14% annualized return in 2012, which turned out to be close.

The report also indicates a 33% chance that the S&P 500 could underperform inflation by 2034.

DD’s Take: Nobody has a crystal ball. Every projection is an opinion based on the most recent data available. Keep investing and carry on.

The Sector Rotation Strategy

But first, what is a sector?

A “sector” is a group of stocks that are in a similar line of business.

You can find the 11 market sectors below.

One thing people don’t realize is that these sectors are all correlated in one way or another.

For example, if the price of oil falls, companies that produce or transport oil will make less money as a result.

If interest rates rise, the real estate sector will make less money because more people will be defaulting on their loans.

The correlation runs deeper than that, but surely you can see how one impacts the other

Market sectors are more connected than you might think, which is why it’s so important to diversify your portfolio by sector.

Doing this reduces the risk of putting all your eggs in one basket, ending up like our friend below…

Do You Know The Economic Cycles?

The economy moves in a cyclical pattern that is widely known as the economic (business) cycle.

This cycle travels through 4 phases:

1. Expansion: the economy experiences rapid growth, interest rates are usually low, and production increases 📈 

2. Peak: occurs when the economy hits its maximum growth rate. Prices start to stabilize and we see periods of higher inflation that the bank tries to tame by raising interest rates ⛰️ 

3. Contraction: also known as a recession (or a “correction”) is a period where employment falls, growth slows down, demand starts to drop and markets see excess supply and downward movement in prices 📉 

4. Through: the lowest point in an economic cycle. The point when companies start re-evaluating their budgets in anticipation of the next expansion 🌊 

The cycle continues to repeat itself over again.

Historically, a complete business cycle happens approximately every 5 years, but of course, this can vary depending on the economy.

The best part is that once you understand that the market goes through a cycle and which stage we’re in, then you can plan when to buy, what to buy, and how long to hold.

And that is exactly what we’re covering in the rest of this post.

How Does a Sector Rotation Strategy Work?

Sector Rotation is an active investment strategy that consists of moving money from one sector to another in hopes of beating the market.

If you’re looking to implement this strategy, just know that it will require more of your attention to the market.

As mentioned above, the economy goes through the business cycle and at different phases in the cycle there are certain sectors that perform better than others.

Cyclical sectors, those that are more sensitive to the economy, will typically perform better during periods of expansion, while non-cyclical sectors, those less sensitive to the economy, will perform better during periods of contraction.

Below you’ll find a chart that shows what type of sectors best perform during which phases in the market.

During a market bottom, some of the best sectors to buy are finance, technology, and cyclicals.

As the market starts to recover, the sector rotation strategy states to keep money in technology and move some into industrials and basic materials.

As we reach the market top, basic materials, energy, and consumer staples perform best.

As we enter late bear markets, it may be wise to buy in the healthcare, utilities, and finance sectors.

Below is the complete breakdown. Keep this image close.

Sector Rotation ETF Strategy

A simpler alternative than trying to pick stocks inside a sector that may or may not perform well is just to use ETFs that focus on specific sectors and implement the strategy that way.

This allows you to stay much more diversified without the stress of having all your eggs in one stock.

It’s also great if you don’t know what you’re doing when stock picking.

There is truly an ETF for everything.

Cons of Sector Rotation

The cons of this strategy are simply the fact that we don’t have a crystal ball.

Although basic economics tells us that certain leading factors indicate which way the market is going, things like housing starts, money supply etc., there is no way to guarantee anything.

Even economists who dedicate their lives to studying the economic cycle can make mistakes.

The economy will never follow the economic cycle exactly the same way every time and it’s important to understand that misjudging the cycle could lead to losses.

Another con of this strategy is that it’s an active strategy. If you have to pay commissions on your trades it may not be worth it long term.

Make sure you’re only doing this strategy if you have access to no-fee trading.

In 2024, you shouldn’t be paying a single dollar to trade stocks. If you are, it’s probably time to switch brokerages.

The Partially Implemented Contrarian Sector Rotation Strategy

What a mouth full that was… I’ll explain…

As a long-term investor, this strategy can be partially implemented to generate more wealth over time, but in a contrarian way.

For example, throughout the last 4 years while rates have been rising, nobody wanted to touch the financial and real estate sectors.

Stocks were left ignored, which presented a buying opportunity.

So that’s what I did.

I bought up a bunch of shares of my favorite REITs and Canadian Banks and now I look like a genius.

When in reality all I did was buy what nobody wanted, so that I owned them when people started changing their minds.

That’s how you build wealth in the stock market.

Alex (The Dividend Dominator)
Founder and CEO of Dividend Domination Inc.
Follow me on Twitter, Instagram and LinkedIn

Vanguard Information Technology ETF (VGT)

This passively managed Vanguard ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the IT sector.

Top Holdings:

5 Year return of 177.06% as of time of writing.

YTD return of 24.02%.

As per Tipranks, the ETF has a 14.99% upside with a high price target of $833.11 and an average price target of $687.27.

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