We’re nearing the end of 2010 - a year, marked by a lingering Sovereign Debt crisis in Europe and market interventions by Central Banks in the U.S. and Japan. Fears of a double-dip recession set in at mid-year as economic indicators began to rollover. After pundits opined thousands of articles on fear over Hindenburg Omens, Dow Sell Signals, Financial and Health Care reforms, double-dip recession, falling Leading Economic Indicator (LEI),and tax cut extensions…the market’s higher. It’s time to look back at what moved the market higher and reflect on where the market has been. Reflecting on where we’ve been can give some clue as to where we’re going from a cyclical point of view.
At yesterday’s close on the S&P 500, the S&P 500 was up 11.8% year-to-date. So any sector below 11.8% has underperformed and any sector above 11.8% has outperformed. As determined by Standard & Poor’s Global Industry Classification Standard (GICS), there are 10 sectors, 24 industry groups, 68 industries, and 154 sub-industries. Of the 10 S&P 500 sectors, 4 outperformed: Consumer Discretionary, Industrials, Materials, and Energy.
Source: Standard & Poor’s
Breaking the GICS sectors down into the 24 industry groups, 13 outperformed the broad S&P 500 index. The leaders were: Automobiles & Components Industry Group, Consumer Durables & Apparel Industry Group, Transportation Industry Group, Consumer Services Industry Group, Real Estate Industry Group, Retailing Industry Group, and Capital Goods Industry Group.
Source: Standard & Poor’s
Breaking the GICS 24 industry groups even further, we get the 68 different Industries. Of the 64 industries with data in 2010, 36 outperformed the broad market. Epic performance was shown in the Automobiles industry, up 63.61% as of yesterday for the year. Within the Automobile Industry, Ford was the big winner this year, up 68.5%, and Harley Davison, up 36.43%. I guess people are buying cars and choppers with cheap financing available, courtesy of the 2008-2010 Federal Reserve Bank. It says so in the monthly retail economic data.
Source: Standard & Poor’s
I won’t break down the 68 industries into the 154 sub-industries because I think by now, you get the gist of 2010’s performance breakdown as of yesterday, December 20th, 2010. With over 50% of the industries outperforming the broad market this year, it has paid to be an industry investor instead of an index investor.
Notice in the first table, that Consumer Discretionary and Industrial sectors were the top performers in 2010? The market doesn’t seem to agree with market commentary that the U.S. consumer is dead. Consumers came out in droves for the seasonal offerings during back-to-school sales and during the holiday season this late-Fall/Winter. Margins were squeezed, but most retailers have shown store sales are going up.
With technology and consumer discretionary stocks as the top performers in 2009, and the addition of the industrial sector in 2010, sector rotation theory would suggest we’re still in the early economic recovery stage and in the bull market stage of a cyclical bull market. As the stock market acts like a discounting mechanism, the red “market” line bottoms before the green “economic” line bottoms.
Source: www.stockcharts.com
So the returns in technology, consumer discretionary, and industrials over the past two years are doing just that – predicting a recovery story. I don’t argue with the market, as long as technical and economic indicators all match up. Remember during the summer of 2010 when fears were rampant over a double-dip recession? During the second quarter earnings season, we were pleasantly surprised –as were analysts – by Caterpillar’s earnings beat. Analysts were pessimistic on the company, only betting the company would do 22 cents per share. They beat by a large margin with $1.74 earnings per share. The stock is up 64% as of yesterday for the year.
Sector Rotation Theory would suggest that the next sector to perform is energy and basic industry as the cyclical bull moves on. The industries to watch are then the Energy Equipment & services industry as well as the Oil, Gas, & Consumable Fuels Industry. Has anybody been watching the coal stocks over the past few months? The Coal ETF (KOL) is up nearly 44% since August 31st. Two other industries I’ve taken notice of are the homebuilders and financial industry groupings. These too are starting to show life as my colleague, Tom Smith, coined the term in his wrap up yesterday, “the better or worse view of the market” seems to be deciding performance. As sectors look better based on technical and/or economical data, the market is rewarding them by bidding up their price. Ever since December seconds Pending Home Sales Index rose 10.4% in October, the homebuilders have been on a tear. Watch this group over the next few weeks.
