“A what?”

That’s the response from my 10-year-old when I asked if he’s ever played with an Etch A Sketch.

As he toyed with his iPad, I told him it’s the original tablet that you simply shook to start over.

Which makes it the perfect tablet for writing a script for this stock market — shake it and start over!

It sure would be nice if a script like that did exist. Some have even tried to assume that the economic cycle follows some nice plot with stock market sectors responding on cue.

But it’s never that simple.

Toss in an unpredictable pandemic and a suddenly hawkish Federal Reserve, and there’s no telling what comes next.

Take the Omicron variant for example. As predicted, reopening and cyclical plays plunged as concerns about the new COVID variant ramped up.

At the same time, many investors tipped stay-at-home plays to rally. Plunging interest rates were icing on the cake, because that would help make valuations more attractive on this expensive growth segment of the market.

Instead, everything sold off…

Let’s shake that Etch A Sketch again!

Drawing Up a New Plan

Here’s the dilemma facing investors right now…

Cheap stocks end up levered to the known-unknowns that come with the pandemic. That’s because reopening plays and cyclical stocks offer the cheapest valuations, broadly speaking.

And while many growth stocks have business models that are more durable in the wake of COVID, that’s already reflected in their valuations.

In fact, growth stocks are the most expensive ever by some measures, which is why the Federal Reserve’s new hawkish tone is weighing on their shares.

So, what script should you follow now?

I’ve previously advocated for a barbell approach, because of how difficult it is to predict markets today.

But you can also target sectors that combine aspects of growth and value, preferably with secular tailwinds that are less apt to disruption.

Take Shelter in This Sector

There’s one corner of the stock market that offers the best of both worlds … complete with incredible secular drivers along with rock-bottom valuations.

And that’s with stocks tied to the housing market.

Secular tailwinds that will drive demand for housing include a lack of new homes built over the past decade, while millennials reach peak age for household formation as you can see below.

millennial driving peak household formation

Source: Lennar Corp

(Click here to view larger image.)

Now just take a look at the growth and valuation profile of the iShares U.S. Home Construction ETF (BATS: ITB).

Using the most recent holdings data, the average forward price-to-earnings ratio is 15.2 compared to 21.3 for the S&P 500 Index. And the rate of earnings growth is 65% higher than the S&P 500 on average for next year.

That’s why you should grab growth at a reasonable price with ITB!

Best regards,

Clint Lee
Research Analyst, The Bauman Letter