If you are trying to get a jump on the leaders of the next bull market, you need to look forward — not backward, according to Kevin Barry, chief investment officer at Summit Financial. That means not relying on previous winners, like tech. The sector has been crushed in this year’s bear market, leading some to wonder if the sell-off has provided an opportunity to buy. “History has shown us that the leaders of the last bull market are not the leaders of this bull market, at least in the last 50 years,” Barry said. Energy, for instead, outperformed in the ’70s, but consumer staples led the bull market in the 1980s, he said. Tech rode the wave in the late ’90s and it took 20 years for it to rally back to those highs, Barry pointed out. This year, tech-heavy Nasdaq Composite is down about 30%. “The idea of, ‘When does tech get cheap enough to buy’ is the wrong idea,” Barry said. “You should be focusing on, ‘What will be leadership?'” When it comes to what could lead the market through the next bull market, energy looks promising, Barry said. “My analysis shows the amount of capital reinvestments by the firms themselves have been insufficient to increase supply and reliability of energy and therefore I think [energy] has a good likelihood of outperforming,” he said. The sector is also showing signs of both absolute leadership and relative leadership, he said. “Right now the [Inflation Reduction Act] contains some negative things for fossil fuels, but in spite of that the XLE keeps rallying,” he said. The Energy Select Sector SPDR Fund , XLE, is up about 57% year to date, yet the exchange-traded fund has seen outflows of more than $187 million in 2022, according to FactSet. Conversely, the tech-heavy ARK Innovation ETF , led by Cathie Wood, has lost more than 60% this year but has seen positive inflows, Barry said. More than $1 billion has poured into the fund this year, data from FactSet shows. “People are still putting money into trying to get yesterday’s thing to happen again,” Barry said. In addition to energy, Barry thinks industrials look interesting, particularly aerospace and defense. The sector may see restocking of materials used in the Ukraine-Russia conflict, he said. Financials also could be poised to lead, particularly insurance. For instance, as the cost of home repairs rise, people may be upping their coverage, he said. “Property and casualty insurance is making a new relative high, relative to everything else it is doing well,” Barry said. While the best part of financials is insurance, regional and smaller banks should also fare well. People are still using their credit and debit cards, which provide income in the form of fees and interest, the lending business is still doing well and banks are benefiting from higher interest rates, Barry said. Overall, he likes small-cap stocks over large cap as leaders of the next bull market, value over growth, U.S. over international and equal-weight funds over market-weight funds. That could mean investors moving money out of the market-weighted SPDR S & P 500 ETF Trust and into something like the Invesco S & P 500 Equal Weight ETF , he said.
