Ep 54: How to Find Investment Sector Opportunities

In my never ending quest to learn how to make my money make money, I'm ready to go back to that giving our money a job analogy we had earlier. We're in our abundance mindset and we're visualizing our money going to work for us. And our money is working as hard as we do to bring more income. Our money has graduated and is ready to be put to work, but it needs to decide on a field. you know how much I love a good analogy. When you can't decide what job you want, we can think about the fields.

And there are 11 sectors our money can choose from. It's actually all related to the business cycle. We can put our money to work in a lot of different ways, but we haven't really done a deep dive into sectors yet. And now is probably the best time to figure that out. Let's go over all of them today. Yeah, let's do it.

You're listening to Market MakeHer, where we demystify how investing works for the self-directed investor, but we do it from 'her' perspective. I know it's football season, but we won't be doing any sports analogies on this show. That's right. We have a different approach in teaching you complex financial literacy concepts and breaking it all down. Teacher learner style, no football analogies, but there will be Taylor Swift analogies. There will only be explanation. That is our reputation.

I'm Jessica Inskip, the teacher with 15 years of industry experience here to teach Jessie and all of you. And I'm Jessie DeNuit the eager student raising my hand to ask all the questions you were afraid to ask in class. I'm here learning alongside you so that we can all eventually retire and not have to work till we're 90. Let's talk about the sectors. We can start with the basic question. What are sectors? When you invest in a stock, you're giving your money a job. You're choosing what

company you think your money is going to excel at. That's the analogy that we use because when we're looking at a stock you want to understand the company that you're working for when you're looking for a job. You want to know that you can grow with that company. Do they have good earnings? What's the culture like? You understand that company as much as possible and you're literally putting your money to work. But before you decide what company or where your money is going to work or what stock you decide,

You could decide a sector or field that interests you and each stock belongs to a sector. OK. How many sectors are there? So there are 11 in total. They are called the GICS sectors. You might hear that. That's a terminology. It's just an acronym. GICS stands for Global Industry Classification Standards and it's produced by MSCI. They have their own industry attached to them as well. So those are like subsectors. So think of it as classifications and it's all in the name. For sure.

GICS stands for Global Industry Classification Standard. And what is MSCI? Morgan Stanley Capital International. there we go. And so they're responsible for the subsectors. They classify the sectors. We gave them the crown of that. It's just globally accepted. They came up with these sectors, and then it was adopted. And everyone's just like, OK, that is what it is.

Yeah, you know it's how like you say Google something that means search is just globally accepted. We accept these things. OK, so we have 11 sectors in total and there are also subsectors of those sectors is what you're saying. There is, yes. Well, we're not going to go through that today. We're going to go through what the sectors are in too much detail. Well, why is it important for us self -directed investors to know about all of these different sectors?

So this is going to be a puzzle piece episode. Whenever you are a self-directed investor, there are a couple of steps that you should take before you start picking stocks. So kind of like this progression. This is after your expenses and high-yield savings account. You've got your emergency fund. You have your 401k. Good rule of thumb, not advice because we don't give that on this podcast, is $10,000 in a passive account of some sort. Something that's diversified. So that could be VOO, which is ETF.

that mirrors the S&P 500 index or something like that. When you start exploring beyond that, you could get into sectors. There is an ETF for every single sector. So these are investable, where you could see a trend. You might want exposure to a sector rather than just an individual security. You can be a little more active. You can be a little more tactical. If you do passive investing in the S &P 500, you don't really have to like.

actively be in there looking at it. But with something like this, we're getting a little bit more dialed down. You need to be paying a little bit more attention. Is that what we're saying? Exactly. Yeah. If you want to be a little more tactical, you want to put your money into a little bit of a harder job. Yeah. That's what we're doing. A little harder for you, but you're going to guide it along the way and check in and. Yeah, exactly.

QBRs with it or whatever we do at work. Exactly. That's, that's, yes, that's what we're going to do some quarterly business reviews. That's right. So there are two new words I would like to introduce to you today, which go with the business cycle. So this is an extension of that episode, which is cyclical and defensive. You might hear on finance media all the time where everything is cyclical now, or I'm getting into cyclicals or I'm moving defensive or the markets moving defensive and the markets moving cyclical.

We categorize all of the sectors into either cyclical or defensive. OK. I did not know that. It literally just has to do with the business cycle. That's why I wanted to start with that episode first. Cyclical means it's following the business cycle. How easy is that? It is a It's a cycle. It is a cycle, yes. So when you expect expansion,

So meaning they're going to do well when the economy is doing well. So you invest when you expect periods of growth. So there's expansion phases. And they do poorly when the economy downturns or there's those turning points and there's contractions. So they're cyclical because they literally follow the business cycle. so you're saying some of these 11 sectors are cyclical. can either fall under the cyclical or defensive categories.

Cyclical is just a little bit more GWT volatile because it follows the business cycle which goes up and down. Yeah, which it can be. It can be. Yes. Because it expands and contracts along with the business cycle. Exactly. You need to understand how the business cycle works and pay attention to it and follow along with it. Yeah. And then defensive sectors, you tend to invest in those in periods of contractions because they're defensive.

against the cycle. the economy is taking a downturn, then these tend to perform well, which I guess we should give you an idea of what that means. Yeah. So what are defensive sectors? they're more resilient during economic downturns. Those are like utilities and consumer staples. Those are two sectors that we'll go through because you're going to pay your electric bill. need to. That's revenue. It's consumer staples because you're going to

you're going to buy groceries because you need that to survive. Whereas something that's cyclical is consumer discretionary, which would be like those Lululemon pants or handbags. or... Yeah. Yeah. So you're going to cut back on those. Like when the business cycle is in its expansion phase and everything's doing great, we're all making money. We're spending it on more than just our basic needs. Exactly. So defensive sectors are less volatile, more stable.

especially in economic downturns and could almost be seen as recession proof, maybe. Yeah, absolutely. So key differences. Cyclical sectors are sensitive to economic conditions. They do well when the economy is growing, but can struggle during recessions or contractions. Defensive sectors are stable across all economic conditions because they provide essential goods and services that people need regardless of how the economy is doing. Exactly. OK, beautiful.

So now what we need to do is go through each sector individually, the 11 gig sectors. We'll talk about if they're cyclical or they're defensive, give some examples. Let's talk about sector number one, energy. Let's not confuse this with utilities. So different. This is cyclical. These are the companies that are involved in exploring, producing oil, gas, renewable fuels, energy powers, literally.

everything. Examples are ExxonMobil, Chevron. They tend to have higher dividends, but they're also really correlated to oil prices. If oil is rising, they'll have stronger performance because they're raising their prices. Remember, companies always, always, always protect their profit margins. They're necessary for global infrastructure and transportation. So if there is any type of transportation that's emerging globally,

that could be a good sign for these type of companies. If there's geopolitical risk, like a war of some sort that cuts off oil supply, that could really hurt them. Does that make sense? Yeah. So that's why it's cyclical, because it depends on what's going on in the economy, basically, geopolitically, everything you're saying. If you are having projects that add to infrastructure, then you're going to do that when the economy is growing.

Therefore, this is going to perform well when the economy is growing. And then it's just really vulnerable to commodity prices and demand for oil and OPEC. There's things like that, geopolitical tension, trade policies, because oil is something that we access globally. This also could include solar companies too. So energy is going to be inclusive of all energy securities within that sector. I see.

So if you have a energy ETF, it will probably contain multiple stocks, companies that could be oil, but could also be, yeah, like some solar, solar powered or other kind of renewable energy. That's right. But it's all the energy production and infrastructure. It's not anything that utilizes it. So it's just the energy component of it. OK. That's why it's gas stations. It's the easiest one to use as an example.

All right, that's number one. This is in no particular order, by the way. It's actually quite random. Good to know. Next is materials. This is also cyclical. So this one is heavily tied to commodities. Those are companies that are literally extracting, producing, processing raw materials. Could be chemicals, metals, mining, construction.

So also again, think about infrastructure development. I need materials if we have infrastructure to expand the grid, we are going to need a lot of copper because of AI. So there is an effect because of materials. So examples are Dow Inc, Free Port, MacMoran, Newmont Corporation, mining companies, even these are all just material sector.

And again, the stock markets around you, like we used gas stations before. This even goes into people that produce wood to construct homes. So you can see why that's cyclical, because if you have infrastructure expansion and you need materials, you're going to do that when the economy is expanding. Literally, things are being built and cities are growing, like in the literal sense. Make sense? Yeah. You have to just pay attention to any economic slowdowns that are happening.

This one's really sensitive to interest rates. so interest rates just started coming down, which we talked about last episode, which means we totally expect a period of expansion simply because borrowing costs are going to be reduced. If borrowing costs are reduced, then we expect a spur of investments. And if there is a spur of investments, which leads to expansion in the literal sense, then materials should do well. Yep. OK. Got it.

They are vulnerable to commodity fluctuation, but they can also be an inflation hedge for that reason. Meaning, for example, as copper rises in prices, like the material itself, the company that is involved in mining copper is going to have to raise their price. So therefore, this is going to outpace inflation because it's priced to inflation. Does that make sense? Yeah. So inflation hedge.

That's materials. Okay. We'll get into the fun ones a little bit. Next is industrials. And you put this is highly cyclical. A highly, highly cyclical. These are actually some of my stock backs this week for the Schwab Network. yes. They're the construction companies. They're the transportation companies. They're aerospace, they're defense, capital goods. They provide the machinery, equipment, all of the infrastructure needed to drive those activities like Boeing.

They build planes caterpillar, 3M, triple of those. So that's why it's highly cyclical because these are going to do super, super well if the economy is growing. If the economy is growing, there's more travel. We need more planes. Boeing's going to build planes. If they keep on top of their maintenance. That's true. But that's a great, great comment.

because Boeing has had some issues with that. And that hurts the security because they can't expand. They are vulnerable to that. It's good to do your homework and go into some of other episodes where we tell you how to analyze the stock quote, how to read about the company. And that goes for ETFs too. That's such a good point. Because if you don't want to do the individual securities research, but you want exposure to...

industrials where you can have an ETF that's going to diversify. So if Boeing does come back, you're not fully concentrated in just Boeing. You have exposure to other things as well. Yeah. Yes. That's a very good, very good point. So still economic expansion because businesses have confidence they're going to start having new buildings all of the sudden. Airline travel because of consumer demand, all of that. But fiscal policy has a big impact on this one as well. If there's infrastructure spending.

from the government where they want to make roads, bridges, airports, AI pressure because of the pressure on the energy sector, so energy grids, then companies like Caterpillar are going to do well to help with those infrastructure projects. That makes sense. The big risk, I would say, outside of the obvious, which is a contraction, is global supply chain disruptions for this one.

If you are an industrial company, but you rely on external parts from China, for example, if there is a big tariff, then that's going to really affect you because of the complex global supply chains that we have. I see. So disruptions, natural disasters even, that makes higher cost.

higher costs are going to negatively affect earnings. Yep. Some ideas would be, we see fiscal policy that's going to expand infrastructure. Some risks would be, there is a bunch of natural disasters or possible tariffs. So those are things to be aware of when you're looking at that sector. This is where an investment thesis comes into play too, right? Yes. I love that you said that. This is how you can come up with an investment thesis around something you're seeing happening in the business cycle, the economy.

whatever's going on in the world and then start deciding what sectors you might want to invest in based on that. And then even tell yourself what are some cues, whether it's the Fed doing something in the monetary policy, raising interest rates, cutting interest rates, what are some cues that might lead to this sector starting to tank your portfolio? Yeah, yes. So our cue that we just got is the Fed is lowering interest rates, which means

Now we need to see how the market reacts. So my question is, are cyclicals going up? Remember how we've been talking about market breadth and all of the other sectors are participating? That was anticipation of a Fed cut. Once we got indication that that was happening because the market is forward looking, then we see cyclicals coming up. That's representative of market breadth. So it's a good way, if you understand that, and usually when you log into your brokerage firm and you click on the

part that says what's the market doing or US markets or something like that. There's always a sector section. And this should give you an indication of just glancing at the market how investors are feeling when you understand how these work. Nice. Yes. Bringing it all together. It is. This is a puzzle piece. We should label them puzzle piece. I don't know. Then we can make a puzzle. Number four, utilities. That's defensive. OK. This one's easy. Yeah.

companies that provide your electricity, You're going to try to keep your lights on even when there's a recession, even when you're not making as much money or you're out of a job. You're still going to do whatever it takes to have your basic human necessities. Exactly. So Duke Energy is an example. Dominion Energy, Exterra Energy, energy companies. And they tend to also pay dividends. Stable companies pay dividends. When we say the market's defensive or you all of a sudden see

utilities going up, you might say, investors are cautious. that's why. However, what you're saying about not confusing utilities with the energy sector, though. So utilities, even though we're talking about energy, we're talking about like your basic utilities that you need for everyday life. Yep. There's the energy itself. And then there's the energy provider. Makes sense. This is the energy provider. Yes. However, there has been this big mystery of technologies going up.

which we'll get to in a moment, which is cyclical. And utilities are going up at the same time, which is defensive. So what are investors? Then you just got to put our thinking caps on. artificial intelligence, talked about, we had an episode on the price to energy ratio of lots of power generation that was needed. And it has so much pressure on the grid. And so that caused utilities to go up. Companies rely on this for AI and cloud infrastructure. Therefore, they're going to get

more energy spent, more earnings. That happened. even though it's defensive, we think of it as a more steady type of sector. It can still have its upticks based on what's going on. Absolutely. Always. Yes. But this is more defensive in comparison to the others. If we're moving to clean energy and things like that, that's where stock picking might be more beneficial than just the utilities altogether. Yeah.

Or one that has a little bit more concentration in certain areas. You can find ETFs that are purely just renewable energy. There's an ETF for that. We could make a whole episode on that. I know. We're going. Yes. OK. All right. And then our next defensives -ish would be the health care sector. -hmm. So like Pfizer, United Health Group, things like that.

Yes. So they provide medical services, medical equipment, pharmaceuticals, biotechnology. It's defensive because we need our health care. Yeah. And then, of course, the opportunity we talked about. We have an aging population, so there could be long -term growth. So that has demand for health care. They're vulnerable to regulatory and political risks.

If they're introducing price controls, the government is with Medicare. That has an impact because they can't raise their prices. If they can't raise their prices, then that's going to be lower profit margins. That's just how it works, not an opinion. OK. So that's health care. What number? Number six? Six, yeah. Financials. These are your banks. Cyclical. Cyclical, OK. Yes. Yep. So these are your brokerage firms even. Charles Schwab's public company.

Morgan Stanley's public company, Robin Hood's public company, Becca Marcos' public company, Goldman Sachs, JP Morgan. So they are heavily, heavily influenced by interest rates because of their in the business of borrowing and lending money. And so they're also heavily influenced by economic growth and monetary policy. There are some benefits to higher interest rates in some forms of the financial sector, but they also is a benefit.

to lower interest rates and a lower short end of the curve because of their activities. So right now, if we, I'm glad I'm in your head there. So we want to see expansion follow through from the Fed's latest actions. I want to see financials go up as a result. OK. So that's that market perception. Our buyers coming in, is there demand for financials? If there's demands for financials and the market believes that we're going to get into this expansion territory.

yeah, because if interest rates get cut by the Fed and that trickles down from Federal Reserve to these banks that we're talking about in the financial sector and then that trickles down to us the consumer, we might be more likely to go get a loan from a bank at a lower interest rate. Yeah. I can see how it can slip up And it'll loosen credit policy and then the money effect happens and all these things. Okay. That's it.

which makes them sensitive to interest rates. This is why we took so long to talk about the sectors. think you needed to know a lot to understand them. Yeah, definitely. All right. Number seven. Consumer discretionary. Highly cyclical this one. Highly cyclical. Highly cyclical. It's discretionary because they are non -essential items. So luxury goods, entertainment, travel, like we were saying. Yeah, consumers are going to buy this when they have disposable income. We've got income to spare.

That's the first thing that you're going to cut off when we experience struggling downturns. Yes, makes sense. Yes. They arrive when the economy is growing. When the feds started raising interest rate, there was a point when consumer discretionary just started falling. And so you could see that almost at the end of the cycle. Lululemon was going, Tesla took a hit. So your Starbucks, Nike shoes, things like that. I mean, when things are booming, I'm sure these companies are.

making great profits. Even when interest rates were hiked, we didn't really see this past year too much of a downturn in some of these top luxury companies for a while. took a while. Fed policy works with long and variable lags. Jesse? I'm seeing that. I love it. They're not just words anymore. They're... Yeah. It makes sense. Yeah, it makes sense. All right. Number eight, another defensive one, consumer staples. Groceries. That's right. Household products.

yeah, like personal care makes sense. Yeah. diet coke is in this one. As we saw, Coke kept raising their prices. it, no, was Pepsi or is it both? One of them like, we're like, we're raising our prices as long as you guys are going to keep buying it. And people did not stop buying their beverages. I love my diet coke. Walmart's in there, Procter and Gamble. Yeah. So that's like defensive because even when the economy

It's not doing well or like in recession or close to one. You might be more likely to go shop at Walmart. Whereas before you may be like, I don't shop at Walmart. And now you're like, well, Walmart's cheaper. You're to go there. Yeah, absolutely. it's for lower costs. So but if those defensive sectors start falling, that's recession territory because I can't afford my groceries. I can't afford my utility bill. That's why it's important to know the business cycle and then know the sectors. OK, but usually these got

Steady earnings, Pepsi, blue chip stock, know, consistent dividend payments. it's because of the reliability, lots of cash flow, people want their Diet Coke. so consumer discretionary is what we talked about before. That's the stuff that like you don't really need, but you have extra money, you're going to spend extra money on it, like a little bit more luxury type things or entertainment travel. This is called consumer staples. These are like staple everyday household products that we need or whatever it is, personal care, things that you kind of just need to.

you know, live every day that you're probably going to keep buying no matter what. Yes, that's right. Exactly. Number nine, the one that makes up 30 percent of our market right now. Information technology. That's right. That's right. one is cyclical. Very, very cyclical. So they develop, manufacture, sell hardware, software, electronics, IT services.

It's considered the most dynamic and fast growing sector in the economy because it's driven by innovation. It's all innovation, which makes sense. Innovation is going to drastically change. So this one is very sensitive to economic cycles. had the Mag7. What was the other one? There was like another term. Hyperscalers. Hyperscalers. This would be the hyperscalers right now. Like Apple, Microsoft, and Nvidia. Yes, this is Apple, Microsoft, and Nvidia. They benefit from strong economic growth.

because that's when companies want to invest. So if interest rates are lower, there is a capex cycle. We're waiting on this investment. But maybe it already happened because of AI was holding up the market. People were still investing in AI no matter what. Yeah. I really think that saved us from a contraction. Yeah, definitely. Which is something to watch. That could lead to bubbles if there's over investment at some point, but not yet.

OK. areas of growth right now, like said, is AI, cloud computing, semiconductors. And that's when those subsectors come in. Like there's software. There's semiconductors would be a subsector of technology. there's an for that? There is an ETF for that, yeah. That could be an episode. I that. so. Like then a hat. There's an ETF for that. So if information technology is a sector, then what were you saying? Like software could be a subsector? Software is, yeah.

Chips, semiconductors is a subsector or industry. You all those. You sure can. The big risk is regulatory and competitive pressures. Specifically right now, the FTC is cracking down. Google Alphabet has regulatory scrutiny right now. There's antitrust practices. They say that they're monopolistic in nature. Well, OK, what I'm saying about TikTok too is not even if they get cut off in the US, but it's a competitor. They're absolutely eating after go. If you're in a

information technology sector ETF that has a high concentration of something like Google and you see that yeah, like Google's in the news or Google's under scrutiny by the FTC or TikTok's coming for Google, like whatever it is, that's why it helps pay attention because they're at the end the day companies and they can, you know, have issues and fall and lose profit margins easily. Yes. It's such a good example. When that TikTok ban was announced, Google

and meta and Snapchat actually increased in value because all the US users are going to go off of TikTok and then move into these other platforms, like go to YouTube shorts and Instagram. Competitive pressure, I think, is really important to know about information technology. So right now there's the race to AI. When you're doing research and development, that's really expensive. So if we're looking at Nvidia, for example, Nvidia would be in this sector and it would fall under semiconductors.

And then we might say, Nvidia has this Blackwell chip and we expect them to have lots of sales. Are we pulling that forward too much? As in the stock price has been up 200%. Are we pulling forward future earnings to now too much? And that can be bubble mentality. We're not there yet, but that's what that means. Like how high can it go? How can it keep rising? Like what's the...

What's the potential there? But it's a heated competition there. Heated competition in information technology, which is why it's more volatile, but also highly growth oriented. right. Number 10, communication services. This is companies that provide telecommunication, media, entertainment, Disney, Netflix, AT &T. largely advertising and subscription revenues.

So this would be cyclical then. This is, yes, cyclical. You may still constantly pay your phone bill, but you might cut off your Netflix subscription. That may be the first thing to go. You might downgrade your phone bill. You're not going to go to Disney as much. Yeah, that's why it's highly cyclical. It almost goes into just consumer discretionary, but it's its own thing. You're right. And they're also really competitive, especially with the subscribers with Disney, Netflix, and Hulu.

People tend to rotate, they crack down on password sharing, then that makes a change. Last one, also very cyclical, real estate. And that's mainly REITs. We haven't talked about REITs yet. yeah. Real Estate Investment Trust. If you don't want to invest in real estate, literally, physically buy the property, you can invest in REITs, which are companies that have access to commercial real estates, could be office buildings.

Things like that, apartment complexes. Shopping centers. So Simon property groups there. But very, very sensitive to interest rate. If the Fed's going to lower interest rates, we would expect a spur in real estate. If you're not in position to be able to buy a house or own real estate or property, you can go to the stock market and get yourself some real estate investment trusts. Yeah, absolutely.

And if you don't want to do the REITs specifically, we can just do the real estate sector that has a bunch of them. Because some of these REITs, like individually, you don't know how they're going to do as a company. So that's the beauty of ETFs. It is the beauty of ETFs. That could start with a high level investment thesis. And then if you really want to drill down to the specific beneficiaries, then you look at the individual companies. But it starts with the sector. Yeah, I like that. For sure.

All right, that's all 11. Nice. We did it. And now I know that when my money isn't sure of its career path, I can always start with a sector. And I can choose sectors based on my risk tolerance and use them as another way to diversify my portfolio. So remember to give your money a job, folks. We keep that money manifesting, going, and growing when we can visualize a path for its success, just like we do for our own careers. That's right. We do.

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