a tale of two markets …or three …or one?

In yesterday’s Keeping ScoreI outlined the performance by sector of the S&P 500 component sectors over the past one and three months.  Here’s the same information for 2015 to date, through the end of September:


Consumer discretionary          +2.9%

Staples          -2.9%

Healthcare          -3.3%

IT          -4.1%

S&P 500 (adjusted, as described below)          -4.3%


S&P 500          -6.8%

Telecom          -7.4%

Financials          -8.4%

Utilities          -8.4%


Industrials          -11.2%

Materials          -11.2%

Energy          -23.1% (ouch!!!).


Index performance falls pretty neatly into three categories:

–relative stars, which are clustered around/above the adjusted S&P 500.  These are, generally speaking, sectors with primarily a US/EU focus and which do well when economies are expanding and consumers are feeling good.  But they don’t depend on rip-roaring commodities-oriented, basic industry-based economic expansion.

–non-descripts, clustered around the index

–clunkers, either basic materials or the Industrial sector which serves basic industry (and also makes lawn mowers and other stuff for consumers)

my adjustment to the S&P

Energy (currently 6.9% of the S&P), Industrials (10.1%) and Materials (2,8%) make up about 20 percent of the S&P by market capitalization.  The three account for half the index’s losses so far this year, however.  The -4.3% return of the adjusted index is the aggregate performance of the other 80% of the S&P through the end of September.  Figure that a holder of those sectors has collected a dividend of around 2% and the total return of the adjusted index looks more like treading water than a catastrophe.

my thoughts

Of the clunkers, the simple story for Materials and Energy is that commodity producers are invariably their own worst enemies.  In good times, they plow their cash flow back into creating new capacity that ultimately floods the market with output and destroys pricing.  The most maladroit borrow the funds needed to shoot themselves in the foot.  Like the biblical seven years of famine following the seven years of plenty, we’re in the early stages of a long downturn.

Industrials are a little more complicated.  Many don’t make gigantic turbines or stamping or cutting machines that would fit comfortably in Soviet propaganda art.  Instead, they make paint, lamps, gardening equipment–any of the stuff consumers buy in a Home Depot.  I haven’t looked at the sector carefully enough to know whether some of the members are being punished unfairly (I suspect not, though, so I’m in no rush to find out.)


On a nine-month view, though, all the fear that seems to be pulsing through Wall Street seems misplaced.


why three markets?

Recent problems with Healthcare don’t reveal themselves in this performance analysis.  The straightforward explanation is that the current swoon is about valuation, and represents simply giveback of earlier outperformance.  Although/because I hold a lot of a healthcare mutual fund run by a super-competent former colleague, I don’t pay enough attention to this sector to have a strong opinion.  I do think, however, that Americans don’t take kindly to firms that make extortionate profits from the misery of others.  Recent revelations that acquisitive drug firms, spurred on by hedge fund backers, have aggressively raised the prices of drugs they’ve bought is probably inviting political backlash.  In any event, I think Healthcare will go its own way.


is this a stable situation?

In other words, will Wall Street simply shrug off the woes of the clunkers by shifting into other sectors, which has been the case so far?  Or will the problems of the 20% eventually drag down the rest?

To me, the answer isn’t obvious.


More on  Monday.





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