Keeping Score

September 1, 2023

August broke the string of up months during late Spring and early summer, falling by -1.8% for the month. I’ve been thinking that we’re in a period of recovery from the fireworks of the covid era. If so, the S&P will likely meander for a while as the market attempts to regain its bearings. A big factor in potential stabilization would be indications–meaning a slowing in inflation–that the Fed thinks its tightening is just about done. Arguably (meaning this is what I think, but I’m not not ready to bet the farm on this idea), we’re there already and what will follow on the interest rate front from now on will be posturing but no significant upward movement in the fed funds rate.

September will be interesting to watch. It’s typically a weak month, as mutual funds do their end of fiscal year balance sheet cleanup (the mutual fund fiscal year ends on Halloween). I’ll write about this next week. Whether this will be the case in 2023 remains an open question, in my mind.

Performance for August:

Energy +1.3%

Communication services -0.4%

Healthcare -0.8%

Consumer discretionary -1.3%

IT -1.5%

S&P 500 -1.8%

Industrials -2.3%

Financials -2.9%

Real estate -3.1%

Materials -3.5

Staples -3.9%

Utilities -6.7%

It strikes me that the underperformers are what define the month. For August, they’re either interest-rate sensitives (Financials, Real estate, Utilities) or the most highly leveraged to strong economic growth (Industrials, Materials). At first blush, the odd man here is Staples, which has a defensive character. But it is also very sensitive to growth outside the US, especially to Europe. Overall, I interpret the unders as signaling economies shifting into a lower gear, especially outside the US.

The outperformers are the usual it’s-not-super-but-it’s not-recession-either crowd–Consumer discretionary, IT and Communication services. Energy and Healthcare march to their own drummers–Energy linked to hydrocarbon prices, which have a vague-ish link to growth, and Healthcare also going its own way (and I sector I’ve never been able to work up much enthusiasm for, and therefore don’t understand particularly well).

August 1, 2023

The S&P 500 continued its upward climb in July, gaining 3.0% for the month. That’s after three considerably stronger months during the second quarter. The clustering among sectors was also considerably tighter than earlier in the year. And, although the sectoral breakdown doesn’t really show this, it seems to me that the running was centered around speculative (read: really really risky) names that had been destroyed last year. This is typically a sign that the market is getting toppy. A potentially more important negative sign is that the ultra-bearish equity strategist from Morgan Stanley, who had been predicting a drop of 25%-ish during the first half, appears to be saying now that we’re in the final stage of an upward market movement. Stocks will go higher for a while, before eventually falling. In other words, the last bear has capitulated. If the stock market generally climbs a wall of worry as it advances, what does it do now, when there are no more bears? For the market as a whole, I think this suggests, if there really are no more bears, sideways at best.

The sector breakout of the performance of the S&P 500 for July is as follows:

Communication services +6.8%

Energy +5.2%

Financials +4.2%

S&P 500 +3.0%

Materials +2.8%

Industrials +2.6%

Staples +2.5%

IT +2.5%

Utilities +2.3%

Consumer discretionary +1.8%

Healthcare +1.7%

Real estate 0.5%.

The Energy sector seems to me to always go its own way, rising and falling with oil and gas prices. Financials are bouncing after a tough first half. Communication services is, for me, a mix of IT and Consumer Discretionary that doesn’t have a lot of predictive power. I find it more telling that Materials and Industrials are outperforming IT and Consumer discretionary. Their relative strength suggests we’ll be in a much more traditional economic economic upturn for a while.

July 3, 2023,

The second quarter of 2023 ended on a strong note, after meandering through the first two months of the period. The month of June, however, was substantially different in the composition of its returns vs. the previous two months. June played out as follows:

Consumer discretionary +12.0%

Industrials +11.2%

Materials +10.8%

IT +6.6%

S&P 500 +6.5%

Financials +6.5%

Real estate +4.8%

Healthcare +4.2%

Staples +2.9%

Communication services +2.6%

Utilities +1.5%

The techy sectors, IT and Communication services, were ho-hum. The tradition up-market sectors outperformed. The tradition defensives held their ground, but did little to advance. In other words, they, too, played their traditional role.

Now look at the quarter as a whole:

IT +16.1%

Consumer discretionary +14.3%

Communication services +12.8%

S&P 500 +8.3%

Industrials +6.0%

Financials +4.8%

Materials +2.8%

Healthcare +2.5%

Real estate +0.8%

Staples -0.2%

Energy -1.8%

Utilities -3.3%.

If we add the first two months of the quarter to June, we see that the three-month period as a whole was mostly about tech. But there’s a significant, and maybe decisive, turn in June toward more traditional beneficiaries of economic expansion. It’s too early to say for sure that the market is looking past the pandemic, the coup attempt and the distortions of zero interest rates. But that’s what the June numbers seem to me to be signalling.

April 3, 2023

Despite continuing broker consensus bearishness, the S&P 500 rebounded from its February loss to finish March up by 3.5% and the quarter with a gain of 7.0%. The real story, though, is not in the aggregate numbers but in the sector breakdown. To make it clear what’s going on in the stock market, I’ll begin with the 1Q23 sector breakout:

IT +21.5%

Communication services +20.2%

NASDAQ +17.6%

Consumer discretionary +15.8%

S&P 500 +7.0%

Materials +3.8%

Industrials +3.0%

Russell 2000 +2.9%

Real estate +1.0%

Consumer staples +0.2%

Utilities -4.0%

Healthcare -4.7%

Energy -5.6%

Finance -6.1%.

Basically, as I see it, the story of 1Q23 is that the stocks that had been at the bottom of the pile throughout 2022 stopped falling. Not only that, but IT, Communication services and Consumer discretionary all rallied significantly to open this year. This wasn’t a judgment about current quarter earnings power, because there wasn’t much of that. Instead, it was about valuation, the idea that these stocks had fallen far enough that investors would be, sooner or later, well compensated for being willing to wait for earnings growth to resume. My guess is that this will be in the second half.

In an ironic development, the collapse of former high-flier, Silicon Valley Bank (SIVB), a victim of its own incomprehensibly bad management, seems to have put a floor under the stock market. That’s because smaller banks, fearing higher than normal withdrawals from deposit accounts, will become more cautious about making new loans–thereby slowing economic growth. This implies the Fed will have to do less future monetary tightening than previously expected to temper inflation.

March performance for the S&P:

IT +10.9%

Communication services +10.4%

Utilities +4.6%

Consumer staples +3.9%

S&P 500 +3.5%

Consumer discretionary +3.0%

Healthcare +2.1%

Industrials +0.6%

Energy -.05%

Materials -1.3%

Real estate -2.1%

Financials -9.7%.

Again, tech-ish stocks dominated. The failure of SIVB cast a pall over Financials. Consequent worries that a cooling economy will further depress demand for rental of office space cast a pall over the Real estate sector, as well.

March 1, 2023

After falling by 2.6% in February, the S&P 500 has trimmed its year-to-date gains to +3.4%.

The monthly performance figures, by sector (capital changes), are as follows:

IT +0.3%

Industrials -1.2%

Consumer discretionary -2.3%

Financials -2.5%

Staples -2.5%

S&P 500 -2.6%

Materials -3.5%

Communication services -4.7%

Healthcare -4.7%

Real estate -6.1%

Utilities -6.4%

Energy -7.6%.

This sector by sector numbers are a real mixed bag. On one hand, the top three industries in terms of performance are all highly economically sensitive. On the other, laggards Healthcare, Utilities and Real estate typically have bond-like defensive qualities. In other words, despite the fact that the overall market went down last month, the pattern of relative performance remains bullish.

Brokers, on the other hand, remain very bearish:

–Morgan Stanley, which apparently has been predicting a 1Q23 market fall of (possibly, maybe, could be) 25% remains bearish, arguing that buoyant stocks are, in effect, a ruse to try to trick unwary investors into continuing to hold stock in companies whose wretched 2023 earnings will drive their prices down as poor profits are announced. Maybe so …but both WMT and TGT have said publicly that MS is right about this year’s earnings being weak, for them at least–but their stocks are flat to up.

–JPMorgan, bearish but not so deeply as Morgan Stanley, argues that investors should sell stocks and buy short-term bonds. The idea, as I understand it, is that the two-year Treasury, say, yields 4.8%. So the holder collects 9.6% over the next 24 months and then gets the principal back–at a time, presumably, when it will be safe to buy stocks again. Two flies in this ointment: the smaller one is that the S&P 500 yields about 1.6%. So the excess income from holding bonds for two years is 8%, not 9.6%; the larger is that if the S&P has an ordinary two-year performance over the next two years, the index will be about 17% higher than it is today. That would mean about double the return on holding short-term bonds. The breakeven point is a tad under a 4% annual return on stocks. In effect, then, the JPM suggestion presumes an unusually lifeless stock market over the next two years.

Another wrinkle: the FAANGs make up almost 14% of the S&P, with AAPL alone at 6.3%, GOOG at 3.0% and AMZN at 2.5%. These are, in my view, very mature companies. They’ve all reinvented themselves several times over the years. But were this unusual reinvention ability to run out of steam, the market ex FAANGs could do quite well without the index moving much. One might argue, then, that avoiding the FAANGs is a superior strategy to allocating away from stocks to short-term fixed income.

Still another: to the degree that trading bots are in control of short-term market movements and to the extent that they feed on brokerage research and not on thoughts like mine, they may turn a questionable strategy into reality.

My bottom line, at a very confusing time: the same as it is at almost any other time–that is, hold some combination of the index and individual stocks trading a reasonable PEs vs. bonds, where you understand and believe in the corporate strategy, and where you’ve read all the pertinent SEC filings.

February 1, 2023

The consensus of stock market strategists at the end of last year was that the first half of 2023 would be weak, perhaps brutally so, followed by a better second half. “Better” was generally framed as a relative, with the consensus wavering between at best flattish until the dawn of 2024 and a mild clawback of the losses through June.

Knowing that the market invariably acts in a way that will make the greatest fools out of the largest number of people, it was clear from the outset that such an almost universally held opinion must be wrong. The scary outcome would be that the consensus would be shown to be too sanguine, the Pollyannish that we’d start upward and never look back.

With the S&P and Nasdaq down by 25% and 35% from their respective highs but now closing at higher lows in short-term trading, and with the S&P at about 18x estimated earnings for 2023, I find it hard to be ueber-bearish. Among the myriad Wall Street maxims, though, I’ve found one of the most powerful to be that the bear market isn’t over until the last bull capitulates. It seems to me that in today’s market we all know that the last bull standing is Cathie Wood of the ARK funds. Despite being down by 75% from the 2021-22 highs, I don’t see any signs of capitulation. If anything, it’s the opposite.

For the lack of a better strategy, my stance is to hold stocks I think have strong two- or three-year prospects, plan for a sideways market, and hope for the best. Lame, yes, but so far, so good.

The S&P had a surprisingly good opening month, gaining 6.2%. The sector breakout is a follows:

Consumer discretionary +15.0%

Communication services +14.2%

NASDAQ +11.5%

Real estate +9.9%

IT +9.3%

Russell 2000 +9.3%

Materials +9.0%

Financials +6.7%

S&P 500 +6.2%

Industrials +3.7%

Energy +2.7%

Staples -1.1%

Healthcare -2.0%

Utilities -2.0%

Note: I’ve included the tech-heavy NASDAQ and the small-cap, mostly domestic Russell 2000 to give a bit more perspective.

As we can see from my 1/17 comment below, January 2023’s sector movement is pretty much the inverse of full-year 2022 performance. This could simply be a technical bounce for last year’s losers, on the simple thought that 2022’s weak performers had fallen too far, too fast. My sense is that there may be more than this, the idea that some members of the losers club may be too cheaply valued based on their balance sheets and/or longer-term earnings potential. At the very least, some of this relative sorting appears to me to be going on. If we’re lucky, this sorting will become the main preoccupation of the market (rather than deciding to gyrate up/down) over the next few months. Too soon to be sure, though.

January 17, 2023

I’m finally getting around to looking at the sector breakout of returns for the S&P for full-year 2022. Here there are, with their yearend weighting in the index (I’ve put the three largest sectors of the eleven in bold, the three smallest in italics):

Energy (5.2%) +64.6%

Utilities (3.2%) +1.6%

Staples (7.2%) -0.7%

Healthcare (15.8%) -2.0%

Industrials (8.7%) -5.5%

Financials (11.7%) -10.5%

Materials (2.7%) -12.3%

S&P 500 -19.4%

Real estate (2.7%) -26.1%

IT (25.7%) -27.6%

Consumer discretionary (9.8%) -36.2%

Communication services (7.3%) -36.7%.

In many senses, 2022 was an extraordinarily complex year: the end of the pandemic, the emergence of a new “normal” for how work is accomplished, supply chain disruptions, the Russian attack on Ukraine and the attendant spike in world oil and gas prices, the ongoing Fed effort to restore positive real interest rates in the US (and the dollar strength this induced), Congressional hearings looking into the nuts and bolts of Trump’s attempted coup…

Yet, if we place the Energy sector to the side (ex Energy, the S&P would have been down by about -22%), the sectoral pattern of 2022 returns is pretty much what happens in a down market driven by rising interest rates.

I do think there’s a tremendous amount of nuance just slightly below the surface. Real estate, for example, is typically a yield-driven defensive sector, but is being hurt by the post-pandemic decline in rental housing, as well as the falling demand for office space. If we look at the bleeding edge of tech, which rocketed ahead in the stay-at-home world, we can see a very sharp reversal of fortune since. For example, perhaps the representative vehicle, ARKK, lost a tad more than half its value in 2022, after declining by about 45% in 2021. The same kind of out-/under-performance pattern, maybe not so dramatically, also played out in the Consumer discretionary sector.

One operative question now, I think, is when the bear market will end. I’m of two minds about this. Still, I think it’s not too soon to be rooting through the rubble in IT and Consumer discretionary to find stocks that have suffered considerable damage already and which we’d be willing to own during the next up cycle.

December 1, 2022

Prospects for the Santa Claus rally weren’t looking so good coming into the final trading day of November, with the S&P 500 down by close to 2% for the month. Then Fed Chair Powell spoke. It was very widely expected that he would say that the Fed was going to ease up on the speed at which it would raise the Fed Funds rate, currently 3.75% – 4.00%. Nevertheless, when he did in fact say what everyone presumed he would, the market still took off, the S&P rising by over 3% and ending in the black for the month.

In past bear markets, the discounting mechanism (meaning market participants factoring expected future developments into current prices) typically shifts into slow gear. In this one, however, there’s been almost no anticipatory movement, only reaction after the fact. So too here.

The sector breakout of returns for December is as follows:

Materials +8.9%

Industrials +5.9%

Financials +5.1%

Real estate +4.3%

Staples +4.3%

Utilities +3.9%

Healthcare +2.2%

S&P 500 +2.2%

Communication services +1.8%

IT +0.8%

Energy +0.1%

Consumer discretionary -2.6%.

This month’s pattern is pretty much the same as for October. Energy is the outlier, although that’s presumably partly due to the sector’s huge move last month and partly anticipation that the winter heating season may not be as dire for consumers as previously expected. The final afternoon of the month added considerably to the November performance of the IT and Communication services sectors, leaving Energy and Consumer discretionary as the biggest laggards. A warm but lackluster yearend holiday season?

November 1, 2022

The S&P typically declines from mid-September through mid-October, before rallying into–and through–Halloween. On the surface at least, the market has followed the traditional pattern this year, with the exception that the 2022 dip started in mid-August. It may be that the S&P will follow through with the traditional rally into mid-December, when the market for all intents and purposes shuts down for the year.

We may well have a “Santa Claus” rally as winter approaches. But it’s not clear at all to me that the usual motivation for it–the seasonal rhythm of inflows and outflows from funds–will be the cause. In any event, though, the S&P 500 returns for the month of October were as follows:

Energy +24.9%

Industrials +13.9%

Financials +11.8%

Russell 2000 +10.9%

Healthcare +9.6%

Materials +9.0%

Staples +8.8%

S&P 500 +8.0%

IT +7.6%

NASDAQ +3.9%

Utilities +2.0%

Real estate +1.9%

Consumer discretionary +0.2%

Communication services -0.1%

Energy was by far the best performing sector in October. This sector is small enough, and I’m disinterested enough (although I started out as an oil analyst) that I have no idea why. The best I can do is that both oil and gas prices have rallied a bit in October after having fallen steadily since early June. Arguably we are also in a period of seasonal strength as the northern hemisphere enters winter. It could be, though, that this is mainly a speculation on the possibility of shortages somehow related to developments in the Russian invasion of Ukraine.

Other winners are mostly in stable areas not highly sensitive to the ups and downs of the economic cycle. Banks tend to benefit as rates rise, adjusting loan rates upward more quickly than the rates paid on deposits. It’s also worth noting that the Russell 2000, which is focused on companies whose businesses are mostly US, has begun to outperform the S&P, which has a hafty international component.

October 3, 2022

The S&P made a significant low in the middle of this June, but bounced back up by about 6% before that month ended. As September ends, we’re down by 9.3% for the month. And we also find ourselves about 2% lower than the mid-June low. So much for my choppily sideways idea from last month.

Two changing aspects of the financial markets have struck me recently:

One is the increasing irrelevance of page-one articles in the financial press. Headlines (other than in the FT) seem to me to be becoming click bait, with content only a secondary consideration. Hard to know whether this is a bear market phenomenon–sources not wanting to call attention to themselves in an ugly period–or a new phase in the secular decline of financial journalism.

The other, and more important, one is the increasing sensitivity of stock prices to bad news from companies, however short-term or inconsequential it might be. I read this as investors throwing in the towel on the tactic of buying on decline. It may also be increasing aggressiveness by short-selling bots, as they see resistance to declines melting away. In either case, this is deep bear market stuff. Smaller negative reactions would likely be a signal of sentiment becoming more bullish.

In any event, the returns by sector for September (price changes only, meaning without factoring dividends in) are as follows (Note: I’ve also included the Russell 2000, a mid-cap index that contains mostly domestic companies and NASDAQ, which is primarily tech):

Healthcare -2.7%

Russell 2000 -6.6%

Financials -7.9%

Consumer discretionary -8.1%

Staples -8.3%

NASDAQ -9.1%

S&P 500 -9.3%

Materials -9.6%

Energy -9.7%

Industrials -10.6%

Utilities -11.6%

IT -12.1%

Communication services -12.2%

Real estate -13.6%.

This is really a mixed bag. The outlier among the outperformers during an ugly month is Consumer discretionary, which usually only does well when the economy is looking up. But the Russell 2000 also seems to indicate that the US is doing better than the rest of the world. Real estate and Utilities are the head-scratchers on the downside, since the main attraction of both is the dividend yield, which typically gives them a defensive character.

For the quarter, sector returns were:

Consumer discretionary 4.0%

Energy 1.2%

Russell 2000 -2.3%

Financials -3.6%

NASDAQ -5.0%

Industrials -5.1%

S&P 500 -5.3%

Healthcare -5.6%

IT -6.4%

Utilities -6.7%

Staples -7.2%

Materials -7.6%

Real estate -11.7%

Communication services -12.9%.

Again the performance isn’t purely along offensive/defensive lines. Consumer discretionary is the top performer; Ex Financials, all the defensives underperformed. Again, domestic-oriented businesses seem to be in better shape, as does the broad tech universe measured by NASDAQ vs. the smaller selection in the S&P.

Taking a longer view, year-to-date results for the S&P are as follows:

Energy 30.7%

Utilities -8.6%

Staples -13.5%

Healthcare -14.2%

Industrials -21.7%

Financials -22.4%

Russell 2000 -24.5%

S&P 500 -24.8%

Materials -24.9%

Consumer discretionary -30.2%

Real estate -30.4%

IT -31.9%

NASDAQ -31.9%

Communication services -39.4%.

Here the patterns are closer to what one might expect from a purely top-down economic view. Other than the spike in Energy driven by Russia’s invasion of Ukraine, defensives have generally outperformed and more economically sensitive sectors have taken a beating. Ex Materials, the drubbing administered by the market is in line with increasing cyclicality.

My overall take from the three sets of numbers is that the market is in the process of switching from a purely macro view to examining the nuts and bolts of individual company performance.

September 1, 2022

The S&P 500 lost 4.2% in August, more than all of which came after Fed chairman Powell spoke at Jackson Hole. He didn’t say anything new–inflation is still too high and nominal interest rates too low to restore monetary health to the post-pandemic US economy. Therefore, rates need to be higher, at least temporarily, to get things back in order. The possibility of Fed Funds, now at 2.25% – 2.50%, might need to get as high as 4% for a while, was floated.

The ensuing selloff? All I can come up with is that trading bots reading financial news feeds must have kicked in. Even this may be reading too much into August. The month may simply be giveback of part of July’s gains–a characteristic move of a market moving choppily sideways until the Fed is mostly done raising rates.

In any event, the returns for August by S&P sector are as follows:

Energy +2.2%

Utilities +0.1%

Staples -1.9%

Financials -2.2%

Russell 2000 -2.3%

Industrials -3.1%

Communication services -4.2%

S&P 500 -4.2%

Consumer discretionary -4.7%

Real estate -5.7%

NASDAQ -5.8%

Healthcare -5.9%

IT -6.3%.

I’ve included the Russell 2000 in the list because I think that index, consisting of mostly mid-sized, US-based firms serving US customers, is more indicative of what’s happening here than the S&P, where a large chunk of profits comes from abroad.

August 1, 2022

In my experience, the stock market rarely has its emotions in balance. It’s always either being carried away by greed or by fear. The period from late 2021 until now has been dominated by the latter emotion–not as badly as it was in 2007-09, when the world economy was in truly dire shape (due to bank traders gambling away their firms’ assets on home loan derivatives, with plenty of help doing so from the UK’s “regulation lite” policies), but still pretty bad.

The only way I’ve found to deal with a fearful (and downtrending) market is to step to the sidelines and watch from a distance and try to figure out when the negative emotion may be exhausting itself. Two things I look for:

–a sharp down movement that establishes a low that the market doesn’t subsequently break below (I thought mid-March, mid-May and mid-June were all candidates), i.e., standard technical analysis. The first two didn’t work out. June 16th looks more promising, given that six weeks have passed since this low without the downtrend kicking back in). Also, given that going to the bizarro world of charts is a sign of true desperation, the act in itself suggests a certain loss of hope of the kind that happens around bottoms

–stocks starting to go up on what is in essence the same kind of bad news stocks have been going down on. July is a case in point.

Despite a bunch of “disappointing” earnings, the sector returns for the month are as follows:

Consumer discretionary +18.9%

IT +13.5%

Energy +9.6%

Industrials +9.5%

S&P 500 +9.1%

Real estate +8.5%

Financials +7.0%

Materials +6.1%

Utilities +5.4%

Communication services +3.5%

Healthcare +3.2%

Staples +3.1%.

Staples and Healthcare, the big first-half winners (other than Energy) are at the bottom of the pile for last month. Consumer discretionary and IT are at the top. Every sector was in the plus column.

One could argue that this is simply a question of valuation, or even of the proverbial dead cat bouncing off the sidewalk, rather than sellers exhausting themselves. Maybe so. On the other hand, not everything that has gone down has been going back up, so there’s at least some reflection behind the move.

Illustrative returns:

first half July

S&P -20.8% +9.1%

NASDAQ -30.0% +12.4%

ARKK -58.7% +13.2%

ARKW -59.5% +11.2%.

What I make of this is the obvious–although the two ARK funds each lost about 2x the NASDAQ decline and 3x the S&P’s through June, neither showed much bounce in July, despite the fact is was a NASDAQ-y month. Neither was as bad as META, however, which declined by 1.3% in July and is now down by 53% ytd.

Not so encouraging for ARK holders (I still have a small position in ARKW), but that isn’t the main point. The market seems to be making judgments about the longer-term prospects for individual companies–and this outlook is being reflected in today’s prices. Whether we agree with the decisions the market is making or not is a different issue; as I see it, the kind of rise we’re experiencing is still a sign of subsiding panic.

PS: I’m also writing this two days before I publishing it, suggesting I’m also at least psychologically preparing myself for a more thought-based market to emerge.

July 5, 2022

Still another S&P page hassle. My fault again. These are 2Q figures:

Staples -3.9%

Real estate -4.2%

Energy -4.8%

Healthcare -5.2%

Materials -8.6%

Communication services -13.7%

Real estate -13.7%

S&P 500 -14.5%

Industrials -14.6%

Financials -16.8%

IT -20.2%

Consumer discretionary -25.7%.

Year to date:

Energy +31.1%

Utilities +0.4%

Staples -5.5%

Healthcare -8.0%

Industrials -16.7%

Materials -18.2%

Financials -18.3%

S&P 500 -19.7%

Real estate -19.8%

IT -27.1%

Communication services -30.0%

Consumer discretionary -31.8%.

It seems to me that the three big themes in the stock market this year are:

–the invasion of Ukraine, with the resulting spike in oil and gas prices;

–the return to normal consumption patterns as the pandemic subsides; and

–the related withdrawal of government stimulus, reflected in the return to an environment of higher interest rates.

Ukraine is evidenced mostly in the strength of the Energy sector We can see the return to normal in the way that stay-at-home beneficiaries in IT, Communication Services and Consumer discretionary have been crushed. Rising interest rates are an environment where defensives like Staples, Healthcare and Utilities shine.

2Q figures show small shifts from the 1Q. Communication services continues to fall, but its relative speed of decline is considerably less than in the March quarter. Has all the extra air been taken out of this sector? If so, is it a harbinger of what is to come for IT and Consumer discretionary? Energy is still outperforming, but not at the rate of 1Q. It seems to me that this sector is no longer about relative performance but instead is very strongly tied to the crude oil price. My guess is that the typical professional portfolio manager now has a market weight in Energy (so they’re neither hurt nor harmed by its movements) and will neither buy nor sell for a while. Holders before the invasion, mostly on valuation grounds, are probably selling.

I continue to think we’re more in a bear market in terms of time rather than extent of future declines, with the end of summer being the first price recovery we’ll experience. Recent speculation that the US has been in a mild recession since April/May would reinforce this belief. Given how unusual the current situation is, though, there’s way more guesswork in this assessment than I’d like.

June 4, 2022

Another rough-and-ready monthly analysis. I get my figures from the public S&P site, where it’s more complicated to get data after the last day of a given month than I think the extra precision is worth. I was in the midst of a computer mess on May 31st and didn’t get the month-end figures. Those below include the first two days of June:

Energy +18.0%

Utilities +3.7%

Materials +1.5%

Communication services +1.1%

Financials +0.6%

Industrials +0.1%

S&P 500 -0.5%

Healthcare -0.5%

IT -1.3%

Consumer discretionary -4.9%

Staples -5.0%

Real estate -5.7%.

I see two big influences on the month’s results:

–the war in Ukraine. The conflict elevated the price of oil, metals and grain, driving the Energy and Materials sectors higher. Ex the combatants, its negative economic effects are falling primarily on Europe, whose relatively aged population (midway between Japan and the US) and energy dependence on Russia mean it has limited ability to offset the war-induced drags. The Staples sector is caught both by higher input prices and its relatively large exposure of its multinationals to Europe.

–retailers by and large missed the late first-quarter shift in consumer spending in the US away from pandemic-driven buying (big TVs, furniture, kitchen appliances), leaving them with bloated inventories and so-so sales. Hence, the poor performance of Consumer discretionary.

Tech–IT and Communication services–was a mixed bag as far as performance goes. That’s the best one can say about these sectors this year. Have they been pummeled enough? Hard for me to tell. Many valuations seem reasonable/cheap to me. One characteristic of a bear market, though, is that the same negatives get discounted over and over …and over again, until one day, for no apparent reason, the narrative turns. Are we at that point? I don’t know, although I think the main issue today is time rather than price.

May 1, 2022

the cruelest month? If not, I really don’t want to experience genuine cruelty. The S&P fell by 8.8% for the month. The sector breakout is as follows:

Staples +2.4%

Energy -1.6%

Materials -3.5%

Real estate -3.7%

Utilities -4.3%

Healthcare -4.8%

Industrials -7.6%

S&P 500 -8.8%

Financials -10.0%

IT -11.3%

Consumer discretionary -13.0%

Communication services -15.8%.

At first glance, it looks a bit odd that 7 of 11 sectors outperformed for the month, but that’s because the laggards comprise 56% or so of the market cap of the S&P. Utilities, Real estate and Materials are all really small, each making up less than 3% of the S&P.

Bludgeoning of IT, Communication services (and Consumer discretionary) has resumed as the order of the day. Ytd, the S&P has lost 13.3%, but NASDAQ 21.2%. ARKK, which tends toward the bleeding edge of growth stocks, continues to lose ground, both in absolute terms and relative to benchmarks like NASDAQ– shaving (if that’s the right word) just over half from its NAV so far in 2022, with a 28.8% drop in April.

To my mind, one of the more noteworthy aspects of April performance is the leadership of the Staples sector. Yes, it’s a defensive sector. On the other hand, Staples stocks tend to have high exposure outside the US (50% of revenues would be my guess). That’s not a plus, given the lockdown in China, the war in Europe and the general depreciation of foreign currencies against the $US. Then there’s inflation. Typically, companies in this sector tend to be relatively mature and not to have great pricing power. Customers tend to trade down in tough times, sometimes to the products of private companies below the stock market’s radar. Also, staples manufacturers tend to have a hard time passing along increases in materials prices in inflationary times. Yes, my sense is that the US is doing relatively well–and that we’re returning to normal faster than the consensus expects. It’s the foreign side I’m worried about.

My mental picture of a bear market is that it’s like being in a small boat in the middle of the ocean in a hurricane. We can’t change the weather. We can make sure to fix leaks or bail the boat out should the need arise, though. We can be on the lookout for changes in the weather. And, breaking with this metaphor, we can upgrade our holdings by investigating stocks we don’t hold but might like to, and which are being pounded into the ground for no good reason. Otherwise,

April 1, 2022

No April Fools Day jokes here.

March was a strong month that ended an otherwise dismal quarter. The two high(/low?)-lights of the three months were the continuing implosion of the ARK funds and the Russian invasion of Ukraine.

As to the first, my take is that the past year has exposed the holes in Cathie Wood’s portfolio manager game. If this were baseball, my guess is we’d say she’s all bat and no glove and, if news reports are accurate, she has no desire to learn to play defense. On the plus side, it seems to me that many ARK-ish stocks have been beaten down to levels that imply doubt about their ability to remain going concerns. I can’t believe this can be right about all of them.

On the second, things are going shockingly badly for Russia on the military front. However the war turns out, it seems to me that the invasion may well end up marking a turning point in public opinion in the US and elsewhere on subjects as diverse as the wisdom of relying on fossil fuels and the seemliness of the white racism, conspiracy theories and Putin support of right-wing politics and political “news.”

In addition, although I don’t see this as a stock market issue so far, evidence is building that the January 6th attack on the Capitol was not a spontaneous event but rather part of a months-long, well-funded, Latin America-style plot involving the White House and parts of Congress to overthrow the national government and replace it with an apparatus at least nominally headed by Trump. Strange times.

There is also more conventional economic news for the market to absorb. Given the waning of the pandemic and the significant amount of economic stimulus of the past 18 months or so, the US economy is recovering very strongly. Fiscal stimulus, which has been a key to the bounceback, is waning. And the Federal Reserve has announced plans to tighten its currently ultra-loose money policy over the next year or so. This is a significant headwind for bonds. Since stocks are substitute financial instruments, this is bad for stocks as well. On the other hand, stocks in general should benefit from the higher earnings that a buoyant economy implies in a way that bonds won’t.

As to the S&P 500, the index rallied by +3.6% during March, but ending 1Q22 down by -5.0% despite this. The winners and losers, first of March, then for the quarter, are as follows:

March 2020

Utilities +10.1%

Energy +8.8%

Real estate +7.3%

Materials +5.8%

Healthcare +5.4%

Consumer discretionary +4.8%

S&P 500 +3.6%

IT +3.4%

Industrials +3.3%

Staples +1.4%

Communication services +0.9%

Financials -0.4%.


Energy +37.7%

Utilities +4.0%

Staples -1.6%

Financials -1.9%

Industrials -2.7%

Materials -2.8%

Healthcare -3.0%

S&P 500 -5.0%

Real estate -6.9%

IT -8.6%

Consumer discretionary -9.2%

Communication services -12.1%.

March 8, 2022

This is the latest I’ve been in posting monthly S&P performance since I started doing this in 2009. It’s some combination of travel, spotty internet, work and hiding under the desk. Also, this is a rough and ready analysis, taking February + the first few days of March. I might argue that this is to make the figures more up to date, but it’s mostly that the data are much harder to get after the fact.

In any event, the S&P played out last month by sector more or less as follows:

Energy +15.0%

Utilities +2.6%

Healthcare -1.0%

Staples -2.1%

Industrials -2.3%

Real estate -3.5%

Materials -5.2%

S&P 500 -7.1%

Financials -8.4%

IT -11.1%

Consumer discretionary -11.4%

Communication services -12.9%.

To state the obvious, all the biggest sectors were the worst performers. Tiny ones, like Energy and Utilities, were the stars. Industrials and Materials have typically been outperformers only during times of rip-roaring economic growth. Today, they seem to me to be at the very least hedges against either sanctions against Russia or against deglobalization generally. More tomorrow.

February 1, 2022

January was a tough time for stocks outside the Energy sector. The S&P 500 was down by 5.3% for the month, and that after a rise of 1.9% on the final day of the period. Energy was the only sector in the plus column. The full sectoral breakout is as follows:

Energy +19.0%

Financials -0.1%

Staples -1.5%

Utilities -3.3%

S&P 500 -5.3%

Industrials -5.8%

Communication services -6.4%

Materials -6.9%

Healthcare -6.9%

IT -6.9%

Real estate -8.5%

Consumer discretionary -9.7%

I’ll confess to having a possibly unhealthy fascination with the performance of the ARK group of funds over the past twelve months. To be clear, for several years I have been and continue to been a shareholder of some of them in small amounts in an IRA. But in an industry where underperformance of an index like the S&P 500 by, say, one or two percentage points a year is the norm and where falling behind by, say, eight percentage points means the unemployment line, ARKK has been cut in half while the S&P has risen by close to 20%. That’s close to a 70 percentage point negative spread.

Cathie Wood’s nightmare year has come under close scrutiny in the financial press recently. One article points out that Warren Buffett, whose idea of high tech is IBM, who does not publish his stock market investment performance, and who–I think–has underperformed consistently for the past two decades, is slowly catching up to Wood. An interview I heard yesterday kept referring to Ms. Wood as Woods–apparently so focused on the negative that getting the name right wasn’t important.

My almost totally uninformed hunch is that Ms. Wood doesn’t know much about microeconomics, i.e., company and intra-industry competition, or about conventional portfolio construction, and has no interest in learning. Hence, the evident frustration in a former boss’s recent comments in the FT.

My real point, though, is that my experience is that this kind of stuff appears in the press just as performance is about to turn. And I think that many of the beaten-down stocks she holds look to me to be cheap on an asset basis.

Could just be a one-day wonder, but ARKK was up by almost 10% yesterday.

January 3, 2022

Happy New Year!!!

The US stock market turned in another stellar performance during uncertain economic times in 2021. There was, however, a substantial difference from 2020 results by the three key indices. The numbers:

2021 2020

S&P 500 +26.9% +16.3%

NASDAQ +22.1% +43.4%

Russell 2000 +13.9% +18.4%

Although the Russell 2000 index of smaller-cap, US-centric stocks had a sharp bounceback from the doldrums it endured during the domestic stagnation of the Trump administration, its run was split between late 2020 and early 2021. Because of this, in each calendar year it was handily outpaced by both the S&P 500 and NASDAQ–because the latter indices are tech-rich and have substantial non-US earnings.

During 2020, when innovation and stay-at-home were prominent themes, NASDAQ had a substantial performance advantage. As the pandemic began to come under control–or at least investors began to think they could quantify potential damage–and the domestic economy showed signs of reopening, stock market interest began to shift toward more economically cyclical growth stocks–and away from stay-at-home pure plays. In addition, as investors began to sense that we were near, or past, the bottom for interest rates, companies that tend to thrive as rates rise, like financials, real estate and utilities, started to perk up. All this is what led to the S&P outdistancing NASDAQ last year.

The details are as follows:

December 2021

Staples +10.0%

Real estate +9.7%

Utilities +9.4%

Healthcare +8.8%

Materials +7.3%

Industrials +5.2%

S&P 500 +4.4%

IT +3.3%

Financials +3.1%

Energy +2.9%

Communication services +2.5%

Consumer discretionary -0.3%.

One aspect of the final weeks of the year that I don’t think is reflected in these performance numbers is what seemed to me to be heavy selling of last 2021’s losers. This was presumably done by taxable investors to create tax losses that can be used to offset income on their 2021 tax returns. This means we may well see a “January effect” this month, a rebound of names that wilted the most under tax-selling pressure.


Real estate +16.8%

IT +16.5%

Materials +14.7%

Staples +12.8%

Consumer discretionary +12.7%

Utilities +12.1%

Healthcare +10.8%

S&P 500 +10.7%

Industrials +8.2%

Energy +6.8%

Financials +4.1%

Communication services -0.2%.

The main story I see here is how strong the overall market remained, even though the Fed made it crystal clear in November that it will act more aggressively than previously thought in 2022 to rein in incipient inflation by tightening money policy.

full-year 2021

Energy +47.7%

Real estate +42.5%

IT +33.4%

Financials +32.6%

S&P 500 +26.9%

Materials +25.0%

Healthcare +24.2%

Consumer discretionary +22.7%

Communication services +20.6%

Industrials +19.4%

Staples +15.6%

Utilities +14.0%.

Two things: Energy and Real estate are tiny sectors, at 2.7% and 2.8% of the index market cap respectively (only Materials at 2.6% and Utilities at 2.5% are smaller). This means that IT and Financials were the only significant-sized outperforming sectors last year. The other big ones–Healthcare, Consumer discretionary, Communication services, Industrials and Staples were all bad places to be. This is unusually narrowly focused performance.

Also, if you scroll down to full-year 2020 performance, you’ll see that Energy, Real estate and Financial were among the biggest relative losers last year.

After two years of very strong performance by growth stocks, it would be reasonable to expect that left-behind “value” names should get a turn at bat. I think this is right. Typically in the past, this would imply looking carefully at financials, the big Oils, Materials, Industrials, Staples and maybe Healthcare. I think we’ve got to be a little more nuanced than this in 2022, however, a topic I’ll be writing about over the net week or so.

December 4, 2021

I’ve been tied up with my first big post-pandemic photo project and missed the end of the month. Maybe I was also a bit mesmerized/dazed by the market pyrotechnics of he past week or so, as well. In any event, the figures below are at least directionally correct–and good enough for any of us to work with–despite including the first three (deadly) trading days of December.

During November + the rest of the past week, the S&P 500 lost about 1.5%. The sector breakout is as follows:

Financials +3.5%

IT +2.3%

Staples +0.6%

Utilities +0.2%

Materials +0.1%

Real Estate +0.1%

Consumer discretionary -0.3%

S&P 500 -0.6%

Industrials -2.5%

NASDAQ -2.7%

Healthcare -2.9%

Energy -5.3%

Russell 2000 -6.0%

Communication services -6.1%

ARKK about -25%

The first thing to observe is that, financial media commentary to the contrary, the situation isn’t really dire. Yes, both the S&P and NASDAQ are in the minus column, but just barely. The Russell 2000, which consists mainly of mid-cap domestic economy-oriented firms, has been weaker than the other two. Defensive sectors like Financials, Staples and Utilities, which perk along without a huge amount of sensitivity to economic ups and downs, generally did better than more cyclically positioned. But IT was a relative–and absolute–winner.

The real pain, and consequent media headlines, came in two areas. One might argue that there’s only one. but my tendency is to split last month’s big losers into two categories: stay-at-home stocks, like Peloton or Zoom; and “concept” or “story” stocks, which have been trading on high PE multiples of current earnings (if any) on the idea that big profit growth is just over the next hill.

I’d split this second category again into two piles: those where I have spreadsheets I have confidence in that demonstrate where/when/how profits are on the way; and those where I don’t. The latter group can be separated again into companies where I’m too obtuse to understand what’s going on and those where the numbers just don’t work for one reason or another.

The latest example of what has been happening to the overall big loser group, Docusign reported late last week and dropped by 42% on Friday on the news.

November 1, 2021

A belated Happy Halloween!

After a flattish string of months from July through September, the S&P 500 shifted again into high gear in October. The index added a 6.9% gain during the month, bringing its ytd total to a whopping +22.6%.

What’s a little surprising, to me at least, is that this figure is 6+ percentage points ahead of full-year 2020, a year I would subjectively describe as having afforded epic, once/twice-in-a-lifetime kinds of gains. On the other hand, an ETF like ARKK, the ARK flagship, which was up by 158% (careful readers will have noted that I’m always off by a percentage point or two with this) last year, but is down by 2.6% ytd. That was 100+percentage points higher than the best sector (IT) in 2020, and is 9 percentage points worse than the worst sector (Staples) so far in 2021.

Just as September showed the typical fiscal yearend mutual fund/ETF income tax-related selloff, October showed the typical rebound that occurs once this selling pressure abates. The only pattern I’ve noticed in this is that 2020’s big winners appear to have been pummeled particularly hard and to have bounced back a little less strongly than other stocks.

The October sector results:

Consumer discretionary +10.9%

Energy +10.2%

IT +8.1%

Materials +7.6%

Real estate +7.5%

Financials +7.1%

S&P 500 +6.9%

Industrials +6.8%

Healthcare +5.1%

Utilities +4.7%

Staples +3.7%

Communication services +2.6%.

I think the way to look at this performance is to see it in combination with September results. What sectors fell the least in September and rebounded the most in October? They are: Consumer discretionary, IT and Financials. Which fell the most and rebounded the least? They are: Industrials, Utilities and Communication services.

In other words, the market is now betting that rates will begin to rise (+ Financials, – Utilities) and that consumer spending will pick up. At the same time, it thinks that spending will move away from goods (the Industrial sector is chock full of manufacturers of consumer stuff) and that stay-at-home beneficiaries (like those in Communication services) won’t be the big winners from this turn.

This is not to say the market won’t change it’s mind next week–as they say, the market tries to make the greatest fools out of the largest number of people–but this pattern makes a lot of sense to me.

It also seems to me that, with the first baby steps toward removing pandemic-induced economic stimulus taking place this month, the scales will start to be weighted a little more heavily toward valuation and less toward concept. Last year, valuation meant as close to zero as I’ve ever seen. So far this year, valuation has counted for a bit, but not that much, in my view. My guess is that this is about to change. It doesn’t mean an end to story stocks–after all, every good growth stock has a story behind it–but that PEs and concrete evidence of profit growth will become increasingly important factors.

October 1, 2021

We’re 3/4 of the way through the year, which has been a period unusually chock full of action. I’m not sure whether this is a profound statement about the movement of financial assets this year or whether 2021 has been a “normal” year so far and I’ve just gotten too involved in the hubbub of random daily stock movements.

Let’s start with year-to-date results.

The S&P 500 has gained 14.7% on a capital changes basis so far in 2021. This compares with returns of +18.4% in the pandemic year of 2020, +28.9% as capital flight became a major market theme in 2019, and -6.2% in 2018 as the 2017 rally in anticipation of a lower corporate tax rate ended.

The figures:

Energy +38.4%

Financials +27.4%

Real estate +22.0%

Communication services +20.8%

S&P 500 +14.7%

IT +14.5%

Healthcare +12.1%

Industrials +10.3%

Consumer discretionary +9.8%

Materials +9.0%

Staples +2.6%

Utilities +1.7%.

In hindsight, then, the winning strategy so far in 2021 would have been to load up on banks, which benefit from rising interest rates (same thing for real estate, which not that long ago was lumped in with banks in the Financial sector) and avoid things like Materials and Industrials, which tend to flower in a rip-roaring economy. Yes, Energy has been the clear star of 2021. It’s a tiny sector, though, which is fast losing the strategic importance it had a generation ago. It was down more than 38% in 2020, so a holder from 1/1/2020 still has a loss of about 15%. Still, for anyone with the time and inclination, this could be a good sector to try to trade–an old school alternative to crypto.


Financials +2.3%

IT +1.7%

Communication services +1.4%

Healthcare +1.0%

Utilities +0.9%

Real estate +0.3%

S&P 500 +0.2%

Consumer discretionary -0.2%

Staples -1.0%

Energy -2.8%

Materials -3.9%

Industrials -4.6%.

Again, long Financials and short Materials/Industrials was the key to success. At the same time, IT and Communication services, which reached speculative peaks in 1Q21 and then collapsed, began to recover relative performance. As the ytd scorecard shows, these two sectors are back to average-ish for 2021 to date. (Within these sectors, however, there has been a sharp performance difference between those perceived to be mostly stay-at-home beneficiaries and those with more long-term appeal.)

September 2021

Energy +9.3%

Financials -2.0%

Consumer discretionary -2.6%

Staples -4.5%

S&P 500 -4.8%

Healthcare -5.7%

IT -5.8%

Industrials -6.2%

Utilities -6.4%

Communication services -6.6%

Real estate -6.6%

Materials -7.4%.

Potentially the most interesting aspect to last month, as I see it, is that Consumer discretionary popped up into the group of outperformers. Energy is doing its own thing, as usual, and Staples outperformed, I think, mostly because it has been hit so badly earlier in the year. One could make the same bounceback argument about Consumer discretionary, but it did better than Staples last month despite having outdistanced Staples earlier in the year. One big difference between the two sectors is that Staples has far more exposure to non-US consumers than CD, so this may be more a signal of foreign weakness than US consumer strength. Still, a pickup in consumer spending is the next thing I think we should anticipate. So the performance of CD is something to keep a close eye on, in my view.

September 1, 2021

Another month in the plus column, with the S&P 500 gaining 2.9% in August, bringing the year-to-date total to +20.4%. Dividends added another +1.2% to that. If this weren’t money, it would be boring.

The returns by sector for the S&P 500 in August break out as follows:

Financials +5.0%

Communication services +5.0%

Utilities +3.5%

IT +3.4%

S&P 500 +2.9%

Real estate +2.7%

Healthcare +2.4%

Consumer discretionary +2.0%

Materials +1.7%

Staples +1.3%

Industrials +0.9%

Energy -2.9%.

What jumps out to me in this performance scorecard, even though it chronicles what’s usually the dullest time of year, other than late December, for financial markets? Both IT and Communication services, the two secular growth (as opposed to business cycle-sensitive) sectors are on the outperformers’ side of the S&P. The second is that all the cyclicals, both highly (Materials, Industrials) and sort-of (Consumer discretionary) are on the underperformers’ side.

This is presumably Wall Street’s reaction to the proliferation of the delta variant. There may also be a more subtle element. Evidence seems to show that more affluent, and more highly vaccinated, areas of the country are leading what recovery there is and that more traditionally left-behind, and also less vaccinated, areas are doubling down on their economic caboose-ness. So the Communications services vs. Consumer discretionary dynamic might be written in shorthand as high end +/low end -.

I decided to try this idea out with general retail stores. For the month of August, my selection of five of these plays out like this:

Walmart +3.6%

Dollar General -3.4%

Target -4.8%

Dollar Tree -8.9%

Ollies -22.6%.

The outlier, for my theory anyway, is TGT, which is the most upscale of the five, yet was handily outperformed by WMT. The others are pretty much in the order I’d have expected.

The only thing is that if we look at ytd, the table looks like this:

TGT +41.3%

DG +7.2%

WMT +2.5%

DLTR -11.5%

OLLI -15.9%.

In other words, other than TGT giving back some of its large ytd gains, the dynamic I suggested between haves and have-nots has been in place for most of the year. What may be different, however, is that the floor seems to have fallen out from under DLTR and OLLI, which are the most focused of the group on the left-behinders.

We’ll know more as traders come back from the beach and September unfolds.

August 2, 2021

Another month, another gain. The S&P 500 rose by 2.3%, bringing its year-to-date advance to +17.0%. To put this performance into perspective, that’s more than the 15.8% the index returned during a “banner” 2020.

A digression: last year’s really positive stock price action, epitomized by the ARK funds flagship ETF’s +158% performance, was far away from the major indices. That success hasn’t carried into 2021 (how could it have?), with ARKK losing 8.2% during July, leaving it at -3.6% ytd. Btw, a new ETF intended to short ARKK’s holdings is now being created. If form holds true, this is a signal that ARKK’s worst days are behind it.

As I see it, the key to July performance is the surprise (to me, anyway) rally in Treasury bonds, with the yield on the 10-year note falling from 1.45% to 1.24%. This move is completely at odds with media narratives of booming economy and red-hot inflation, neither of which I think hold up to any kind of scrutiny. A belated recognition of the public health risk created by the unvaccinated? …foreign buying? …just a weird summertime anomaly? Your guess is probably better than mine.

How the stock market was handicapping the situation in July:

Healthcare +4.7%

Real estate +4.6%

Utilities +4.2%

IT +3.8%

Communication services +3.4%

Staples +2.4%

S&P 500 +2.3%

Materials +2.0%

Industrials +0.9%

Consumer discretionary +0.5%

Financials -0.6%

Energy -8.4%.

Let’s look at the losers first. Financials respond in inverse fashion to rises and falls in interest rates. Materials and Industrials are both beneficiaries of a strongly expanding economy, and were already fading in June. Consumer discretionary has now joined them. Energy just does its own thing, in what I believe is a long-term downtrend.

Defensives like Healthcare, Staples and Utilities, on the other hand, all underperformers last month, have begun to outperform. IT, a first half loser, has begun to perk up. Yes, it’s sensitive to the business cycle, but it’s also a secular growth industry, with substantial non-US exposure. Not all IT went up, however. ARKW, which I think is the best ARK-ish IT proxy, lost 3.2% in July, indicating the current investor preference for larger, more defensive names. (For what it’s worth, I own shares of ARKF, ARKG and ARKW.)

All in all, July seems to be signaling a change of heart on Wall Street, away from the bullishness of the first half. It is the summer, though, so it’s hard to know how much of this is strong negative conviction and how much is locking in gains and putting portfolios on cruise control while PMs go on vacation.

July 1, 2021

The S&P 500 had another modestly up month in June, gaining 2.2%. For the second quarter, the advance was 8.2%. The year-to-date performance (all these figures are, as usual, price change only) for the index amounted to +14.4%.

Overall, a happy result. But these numbers don’t reveal the sharp shorter-term sector gyrations that characterized the six months. January showed continuing strength in the winners from 2020. February through early May were marked by a rotation away from last year’s stars and into perceived beneficiaries of post-pandemic reopening. During the past six weeks or so, however, Wall Street has been expressing concern that the pro-expansion rally has moved too far too fast and has reversed course again. It’s unclear to me whether this development is based mostly on relative valuation or whether professional investors are beginning to worry that they’ve been too bullish about the economy’s near-term trajectory.

The one constant for most of 2021 so far has been the outperformance of the Russell 2000, which gained 20.4% during the first half. But that index slowed down in June, rising a meager 1.4% for the month. Because this index is a better reflection of the relative health of the US economy than the larger, better-known indices like NASDAQ and the S&P, which both have lots of non-US earnings, one might argue that this is evidence for the “too bullish” idea. While I think there’s something to “too bullish,” the R2000 has been on such a tear since last November that I suspect its recent slowdown is mostly a question of relative valuation.

The sector breakout for the S&P 500 during June is as follows:

IT +6.9%

Energy +4.5%

Consumer discretionary +3.8%

Real estate +2.8%

Communication services +2.7%

S&P 500 +2.2%

Healthcare +2.2%

Staples -0.5%

Industrials -2.3%

Utilities -2.4%

Financials -3.1%

Materials -5.5%.

The thematic outlier in this month is Energy, which has been a winner throughout 2021. I can’t work up any interest for the sector, even though I started out as an oil and gas industry analyst. On the other hand, Energy did lose 37% of its value in a rising market last year. So arguably seeing it outperform this year shouldn’t be that huge of a surprise. There’s no telling how long this valuation-driven rally will last. But the Energy sector is tiny and I’m content not to participate.

IT is the other very strong sector this month, with enough outperformance to make the quarterly performance look respectable.

The second quarter results break out as follows:

Real estate +12.3%

IT +11.3%

Communication services +10.5%

Energy +10.1%

S&P 500 +8.2%

Healthcare +8.0%

Financials +7.9%

Consumer discretionary +6.8%

Materials +4.5%

Industrials +4.1%

Staples +3.2%

Utilities -1.1%

Staples and Utilities stand out to me in these figures. Both sectors were laggards last year but remain so in 2021, despite the market rotation away from 2020 winners. They have the same secular stagnation issues that beset traditional energy. Global warming aside, the main difference I see between them and Energy is the far worse performance of Energy last year.

First half performance breaks out like this:

Energy +42.4%

Financials +24.5%

Real estate +21.7%

Communication services +19.1%

Industrials +15.6%

S&P 500 +14.4%

Materials +13.5%

IT +13.2%

Healthcare +11.0%

Consumer discretionary +9.9%

Staples +3.6%

Utilities +0.8%

These figures show the strength of the rotation away from 2020 that happened early in the year, with sectors like Financials, Materials and Industrials still ahead of the index ytd despite severe underperformance in June. The sector that really catches my eye, though is Consumer discretionary, which is still a significant ytd laggard despite strong performance in June. The May index performance listed just below this gives another indication of the sector’s lack of bounce, even in a period of market anticipation of reopening. This is the one sector that running the index performance numbers has made me more interested in.

June 1, 2021

Another up month in May, but just barely. The S&P 500 ended the month ahead by 0.6%.

By sector, the performance breakout is as follows.

Materials +5.0%

Energy +4.9%

Financials +4.7%

Industrials +2.9%

Healthcare +1.7%

Staples +1.7%

Real estate +1.1%

S&P 500 +0.6%

Communication services -0.7%

IT -1.1%

Utilities -2.8%

Consumer discretionary -3.9%.

Before sitting down to compile this report, my sense was that it would show that the long correction in last year’s winners had come to an end. While that still may be the case, the latest monthly S&P figures don’t show this. Materials and Financials were the only winning sectors in both April and May. And neither was a big gainer last year, although Materials did eke out a small gain vs. the S&P in 2020. In addition, three of the biggest, and most growthy sectors of the market–IT (#1, at 26.2% of the index), Communication services (#5, at 11.1%) and Consumer discretionary (#3, at 12.1%)–were all relative losers.

More concisely, the numbers show the 2020 stars still taking their lumps. I made a quick check of typical growth and stay-at-home stocks, which seem to show a pro-growth bounce starting just before mid-month. Not strong enough, though, to offset early-month relative losses. Not a huge amount of help for SPAC-spawned names, either.

I think the next couple of weeks will be important to monitor closely. I want to see whether late May growth stock gains reinforce or reverse themselves. If the former, my guess is that the best rebounds will be in stocks where the earnings outlook is clearest, and the worst performance will be from “concept” stocks, where the earnings outlook isn’t very clear or where the strongest conceptual underpinning is the assumption that quarantine behavior will continue strongly in recovery. Note: I’ve already been shaping my own portfolio in anticipation of an end to this year’s “value” stock rally for some months. As is always the case, this means I’m at risk of seeing only what I want to see.

May 3, 2021

Another up month for the S&P 500 in April, as stock market interest continues to shift to reopening or back-to-normal themes.

For April, the S&P 500 sectors played out as follows:

Real estate +8.1%

Communication services +7.6%

Consumer discretionary +7.1%

Financials +6.4%

Materials +5.3%

S&P 500 +5.2%

IT +5.2%

Utilities +4.2%

Healthcare +3.9%

Industrials +3.6%

Staples +2.0%

Energy +0.5%.

Returns for April continue to follow the general pattern of the first quarter–a reversal of 2020 form, with last year’s winners lagging, last year’s losers leading. One possible exception is Energy, a sector that has begun to fade as the winter–the season of peak demand for oil and gas–moves into early spring, typically the seasonal low spot. Just as important, although apparently not in the minds of most US-based investment commentators, is the issue of the possible (I’d say highly likely) decline in the secular prospects of fossil fuels.

The year-to-date return on the S&P (capital changes) already amounts to +11.3%. If the year ended without any further movement (and there most certainly be some, both u[ and down), we’d regard it as a very successful one.

The trailing PE (meaning using today’s price and earnings from the past 12 months) of the S&P is about 40x. The forward PE (meaning today’s price and estimated earnings for the coming 12 months), which is the more important investment variable, is more of a guess than usual, because the E depends crucially on how individuals and firms behave on reopening. If everyone makes a mad dash for stores, bars, restaurants and vacations, the forward PE is probably slightly north of 30x (i.e., earnings will likely grow by 25%+).

The earnings surge would normally imply a roughly equivalent rise in stock prices. In this case, however, the waters are muddier than usual. Earnings recovery will be accompanied at some point by a Fed move to raise interest rates from their pandemic-fighting near-zero state. This sort of move has already started at the long end, with 10-year bond yields rising by about 70 basis points (i.e., 0.70%) so far in 2021. My guess is that there’s another 70-80 bp or so still in store for later in the year.

If so, the stock market story for the rest of the year will be more about continuing rotation into post-pandemic winners–and away from pandemic beneficiaries–rather than serious upward pressure for the market as a whole.

April 1, 2021

Happy April Fools Day!!

Conceptually, at least in my opinion, US stock trading in March was dominated by the same factors as in February and in January–the bounce back in interest rates from the ultra-low levels reached in the dark days of mid-2020, and an internal market readjustment to the end of the pandemic beneficiary and capital flight themes that marked the Trump administration.

The sector breakout of the S&P 500’s +4.2% return for the month is as follows:

Utilities +10.1%

Industrials +8.8%

Staples +7.7%

Materials +7.3%

Dow Jones Industrials +6.6%

Real estate +6.4%

Financials +5.6%

S&P 500 +4.2%

Consumer discretionary +4.2%

Healthcare +3.7%

Communication services +3.1%

Energy +2.7%

IT +1.6%

Russell 2000 +0.9%

NASDAQ +0.4%.

I included the DJI in the March figures, even though I think it’s not particularly illuminating most of the time. (As I’ve mentioned elsewhere, as soon as you hear someone talking about the DJI as a bellwether index, you know that person is clueless–think media commentators.) The Dow contains mostly very large, mature companies, many of which tell more about the past of the US rather than its future. So if you were investing only in indices, this would be the last thing you’d buy. So the fact that it is showing relative strength suggests to me that the current market desire to play return-to-normality stocks is in its final innings.

What comes next? I think a lot depends on interest rates. If I’m correct that the 10-year Treasury will settle in somewhere around the current 1.75% or so, my hunch is that overarching themes, which have carried the US market for the past several years, will give way to relative valuation as the most important metric. If rates continue to rise, however, the best stocks will be those with the lowest current PEs.

Energy, which has been the runaway leader during 1Q21, began to sag in March. Not a big surprise, given that we’re in the slowest month of the year for hydrocarbon demand. It may also be that the rebound from the sector’s left-for-dead state a while ago has run its course.

Weakness in the Russell 2000? I have no idea, other than that it was up by about 60% in the four months from early November through the end of February. For traders with a short-trrm perspective, that screams for profit taking.

1Q21 looked like this:


Energy +29.3%

Financials +15.4%

Russell 2000 +12.4%

Industrials +11.0%

Materials +8.6%

Real estate +8.4%

Communication services +7.8%

S&P 500 +5.8%

Consumer discretionary +4.5%

NASDAQ +2.8%

Healthcare +2.7%

Utilities +1.9%

IT +1.7%

Staples +0.5%.

Energy is, I think, just that everyone gets to bat once in a while. The two sectors that really jump out to me are IT, which is still suffering a hangover from last year’s party and the end to the capital flight trade, and Staples, which is being hit by its large exposure to Europe and the anticipated end to pandemic-induced hoarding and binging on comfort food.

March 1, 2021

February felt like an ugly month for the S&P 500, mostly, I think, because of the way it ended. The cause of the end-month decline was, I think, the across-the-board rise in the yields on longer-dated Treasury securities. I don’t know much about the plumbing of the bond market, so I have little idea of why this happened in February. The fact that Treasury yields have been strongly negative, after adjusting for inflation, is doubtless one contributor. The growing sense that the administration is taking practical steps to deal with the pandemic and reopen the country is another–and that the return to normal life might be faster than we’d previously thought. The likelihood that virtually none of today’s professional bond managers were around for the negative real yields of the 1970s, so they have no relevant experience to draw on now, may be a third.

At any rate, the S&P 500 performance by sector during February is as follows:

Energy +21.5%

Financials +11.4%

Industrials +6.8%

Communication services +6.2%

Russell 2000 +6.2%

Materials +3.7%

S&P 500 +2.6%

Real Estate +1.4%

IT +1.1%

NASDAQ +1.0%

Consumer discretionary -1.0%

Staples -1.5%

Healthcare -2.2%

Utilities -6.5%.

February’s outperformers illustrate what a peculiar situation the US economy (and much of the rest of the world, for that matter) is now in. Financials, which do well when interest rates are rising (typically meaning the economy is beginning to overheat and the Fed is trying to slow down economic growth–although quite the opposite is the case toady), were big winners. But so too were Industrials and Materials, which typically perform best when economic growth is just beginning to rev up (but which start to wilt as rates start to rise). Three of the most defensive sectors, Staples, Healthcare and Utilities (which tend to outperform in a high rate/slowing growth environment), are at the bottom of the list.

As I’ve written elsewhere, I think the rotation into business cycle sensitives is in its early stages and that this is where we as investors should be focused. But because this likely won’t be a plain vanilla recovery, for a while to come being in the “right” sectors may not be as important as weeding out of the portfolio individual stocks whose main/sole attraction is their being stay-at-home beneficiaries. I’m really not eager to bet heavily yet on the coming economic advance being unusually strong, if nothing else because our quarantine experience will likely have made permanent changes in the way some parts of the economy run. Still, I can see the conceptual case for doing just that. How so? Swayed by his amazingly effective salesmanship, I think people generally don’t realize how economically destructive the man guiding the country’s fortunes over the past four years has been. That’s even though he’s the same Trump who bankrupted himself several times in the course of a multi-decade real estate boom–one where, say, tripling your money would have been an embarrassingly meager return. Arguably, just having him gone has got to be worth an extra percent or two of near-term domestic GDP growth. If that’s correct, companies most badly hurt by the pandemic may have better recovery prospects than the consensus expects. So the risk in holding one or two might not be as high as it seems. Personally, I’d like a little more clarity before taking the plunge into deep cyclicals.

February 3, 2021

The figures for this month include the first trading day of February. Quarantine must be getting to me. Feb 1 was an up day for US stocks, resulting in the S&P gaining about 1.6% and swinging from loss to gain ytd; NASDAQ and the Russell 2000 both rose by about 2.5%.

The sectoral breakout:

Russell 2000 +7.7%

Energy +4.3%

NASDAQ +4.0%

Consumer discretionary +3.2%

Real estate +2.8%

Healthcare +1.6%

IT +1.5%

Utilities +0.5%

S&P 500 +0.5%

Communication services +0.3%

Financials -0.8%

Materials -1.3%

Industrials -3.4%

Staples -5.3%.

Let’s start with the easy parts.

The Russell 2000, which contains mid-cap companies that mostly create and sell products domestically continues to lead the pack, as it has since the day after the presidential election. in other words, the market continues to believe the administration change is a substantial positive that will deliver a more certain end to the pandemic and remove the GDP growth deterrents favored by Trump.

Energy had its second strong month in a row. I read this as a function of seasonal demand for heating oil. If so, we should see this relative strength reverse itself as we enter the weakest part of the year later this month–the lull between the end of the heating oil refining and the beginning of strong gasoline production.

The rest is less clear. Materials and Industrials, two sectors very sensitive to world GDP growth, underperformed. So, too, did Financials, a beneficiary of the higher interest rates that a robust economy would bring with it. Staples continues its second-half 2020 fade. Two issues here: Staples has above-average exposure to Europe, where prospects are now probably worse than for the US; and we’re also likely well past peak pandemic-induced demand for traditional not-so-healthy comfort food.

IT and Consumer discretionary, two sectors that hold growthier names and that do best during economic expansion, continue to outperform. They’re joined, however, by Utilities and Real estate, which thrive when interest rates are low. I might be tempted to assess Healthcare as, at least temporarily, a third growth sector, as well. Biotech certainly is a growthy, and vaccine producers would appear to have a rosy near-term outlook. But this is a sector I have little feel for, other than my belief that Americans generally don’t approve of companies making too much money from others’ health misfortunes. Maybe because of this last, I’ve never acquired the technical understanding that’s needed to be successful in this sector. And, of course, Healthcare was a laggard last year.

Typically, both December and January price action can be distorted by year-end tax planning actions taken by corporates (like banks or insurance companies) and individuals. I didn’t notice much of that this time, though.

January 4, 2021

Happy New Year!!!

Let’s start by looking at performance by sector. First December, then 4Q20 and finally the full year. I’m including the Russell 2000 and NASDAQ in with the S&P 500 sectors because those two indices–the former with almost a purely domestic orientation, and in relative decline for the past three years vs. the latter filled with multinationals who have been relative leaders over the same span–have reversed form since the day after the presidential election.

As always, the figures are capital changes only (i.e., no dividends included).


Russell 2000 +9.0

Financials +6.1%

IT +5.7%

Energy +4.3%

NASDAQ +4.3%

Healthcare +3.7%

S&P 500 +3.7%

S&P 500, ex IT +3.0%

Communication services +3.1%

Consumer discretionary +2.5%

Materials +2.3%

Staples +1.4%

Industrials +1.1%

Real estate +0.9%

Utilities +0.4%

December is often an opposite-day kind of month. Taxable investors with a December year tend to do IRS-related selling in December and January. And at least some professionals use the first half of December to rearrange their portfolios in preparation for the new year to come. So the data are sometimes hard to interpret. Still, the Russell 2000 and Financials are the clear December standouts.


Russell 2000 +29.3%

Energy +26.8%

Financials +22.5%

Industrials +15.2%

Materials +13.9%

NASDAQ +13.8%

Communication services +13.5%

S&P 500, ex IT +11.8%

S&P 500 +11.7%

IT +11.5%

Consumer discretionary +7.9%

Healthcare +7.6%

Utilities +5.7%

Staples +5.6%

Real estate +4.1%.

Overall, 4Q was surprisingly strong in absolute terms. Energy came back from the dead and Financials rallied despite the Fed’s assurance that interest rates aren’t likely to rise for a long time. The Russell 2000 was the clear star, however, outperforming NASDAQ by a huge 15.5 percentage points. The stock market appears to have weighed, on the one hand, surging pandemic deaths and Trump’s (scary, un-American, vintage Trump) attempt to use the power of his office to reverse his election loss, lining up a bunch of Yale/Harvard law school-trained sycophantic legislators to support him, against, on the other, the fact that Trump seems to have checked out of his job three months early plus the eventual availability of a vaccine–and concluded this is a big net plus for the domestic economy.

full-year 2020

NASDAQ +43.4%

IT +42.4%

Consumer discretionary +32.1%

Communication services +22.2%

Russell 2000 +18.4%

Materials +18.1%

S&P 500 +16.3%

Healthcare +11.4%

Industrials +9.0%

S&P 500, ex IT +8.4%

Staples +7.6%

Utilities -2.8%

Financials -4.1%

Real estate -5.2%

Energy -37.3%.

–What I find most striking is the reversal during 4Q of the full-year performance pattern. During 4Q, the IT sector makes little difference, while the domestic-oriented R2000 skyrockets.

–One constant, however. Looking at the three sets of performance figures, the Real Estate and Utilities sectors have been consistent turkeys. What they have in common: they’re the sectors that act the most like bonds–meaning they normally generate steady income and exhibit bond-like sensitivity to changes in interest rates. Admittedly in today’s world both are tiny sectors. At the very least, however, they seem to be saying there’s little chance of interest rates declining.

–4Q saw large gains in both Energy and Financials. Despite 20%+ rallies in both sectors during 4Q, however, neither was able to break above Real Estate and Utilities in the stock market basement. Big gains only allowed them to catch up to their bottom-feeding fellows.

–Two possible interpretations occur to me as most likely:

—-the lagging sectors may be performing because short-term traders believe they’ve been beaten up too much in too short a time and therefore must have at least a brief period of relative outperformance. 20%+ in a month (even a sleepy one like December) seems a lot for a counter-trend rally, though; or

—-the market could be starting to discount the possibility of good economic developments in 2021–this despite the increasingly grim pandemic news at present.

–Performance of the Russell 2000 index of mid-cap domestic-oriented companies would seem to reinforce the latter view. That index has been on a tear since the presidential election, rising by 22.3% from November 4th vs. a 15.3% gain for the S&P and 10.8% for NASDAQ. I take this to be less an endorsement of Biden than relief that the current administration is coming to an end.

It’s also possible that the stock market, which most often ignores politics, is beginning in a serious way to anticipate eventual availability of a vaccine that will allow for a return of stronger domestic GDP expansion, which sand to be boosted by reversal of Trump’s anti-growth policies. The argument against this is that normalcy is maybe nine months in the future and that today is too soon to be discounting that. The argument for is that the valuation spread is so wide between multinationals and domestic names that there’s no longer any percentage in maintaining the winning avoid-the-US portfolio positioning of the last three years.

–another thought. My experience is that long-lasting market movements, like the one we’ve had in the US since early 2018, progress in what I think of was waves. The largest and most obvious beneficiaries of an economic trend move first. At some point, investors roll out of the first group and move on to, say, smaller-cap or more indirect beneficiaries. Many times, there’s a third wave, maybe involving suppliers of capital equipment to the first and second groups. At some point, though, the market runs out of new names to roll into. Wall Street then thinks: if there’s nothing left to buy, the only thing we can do is sell–and a correction happens. Last week I wrote about the FAANGs in 2020. The data there seem to me to show that there’s already been a serious rotation away from these large-cap multinationals.

I was trying to find a concrete example. I thought: buy Amazon. When that gets played out, buy Shopify. When that gets played out, buy WISH. But then I saw that WISH had a much less than stellar IPO last month. More fodder for the idea that the “capital flight” rally has gotten pretty long in the tooth.

What I’ve decided to do. I’m going to take 10% -15% of my portfolio out of NASDAQy names (which comprise about 70% of the total), use the money to boost my R2000 ETF position and wait to see what happens.

December 1, 2020

a belated Happy Thanksgiving!!

The stock market began to rally in earnest about a week after the election, posting a gain of 10.8% for the month. The breakout of that return by sector is as follows:

(Note: I’ve added to both lists the NASDAQ as a proxy for major multinationals and the Russell 2000 as proxies for predominantly domestic businesses)


Energy +26.6%

Financials +16.8%

Russell 2000 +16.8%

Industrials +15.6%

Materials +12.2%

IT +11.6%

S&P 500 +10.8%

Communication services +10.7%

NASDAQ +9.1%

Consumer discretionary +8.5%

Healthcare +7.8%

Staples +7.3%

Real estate +6.8%

Utilities +0.3%


The year-to-date results are very different:

NASDAQ +36.0%

IT +34.6%

Communication services +29.6%

Consumer discretionary +28.9%

Materials +15.4%

S&P 500 +12.1%

Russell 2000 +9.0%

Industrials +7.8%

Healthcare +7.2%

Staples +6.1%

Utilities -3.2%

Real estate -6.0%

Financials -9.6%

Energy -39.9%

I’m not 100% sure how to read these numbers. One thing to note is the strength of the overall market after the election results became certain. A second is that within that upward movement, the R2000 and the Energy and Financial sectors are notable outperformers.

My question is whether the movements are purely technical, meaning a counter-trend resetting of valuations between leading and lagging sectors or do they signal a change in market direction away from the secular growth winners of the past year.

The main issue is that Utilities, Materials, Real Estate and Energy are all tiny sectors, together making up about 10.5% of the total index weight. So it doesn’t take much to move any of them by a significant amount. Financials, on the other hand, makes up 10.4% of the index by itself. So this is a much more significant move.

It’s hard to imagine that interest rates are going to rise (something that would be good for banks) any time soon. The other fundamental “usual suspect” is that banks’ book value, that is, their loan portfolios, are being perceived as less risky than they were a month ago. The final choice, the one I’m thinking is the most likely, is that this is a technical readjustment.

I’ll have more to say about this in a What’s Next (ii) post tomorrow.

November 2, 2020

a belated Happy Halloween!!

The most reliable seasonal pattern I know of for US stocks is that they sell off during September through mid-October, in advance of the fiscal year end for mutual funds on Halloween, and they rally through the rest of the calendar year.

That hasn’t happened this time around. The S&P did bottom on September 23rd and rose for a couple of weeks. But the upward momentum in the market (and all of October’s gains) dissipated over the last week or so of the month. This is a time when mutual fund auditors ask portfolio managers to sit on their hands, so there’s no possibility of a trade hanging over from one fiscal year to the next. Personally, I found the last week of October and the week after Christmas (when almost no one on Wall Street is at work) to be two potentially lucrative times to act, so I mostly ignored the accountants. Anyway, this quirk of having a fiscal year ending on Halloween suggests the current selling doesn’t emanate from traditional professionals.

My guess is that this is pre-election nervousness. I haven’t gone back to check whether the sort of selloff we’ve seen over the past few days is normal pre-election market behavior. I don’t think so, however. Nor do I recall Walmart ever announcing it was locking up its guns and ammunition to guard against post-election rioting/looting.

This points out a real deficiency in my market thinking at present. It’s clear to me that another Trump term would rule out any chance of recovery from the very large economic and social disaster he has wrought so far. So interest rates would stay low, the dollar would continue to decline and investors would accelerate their moving assets out of the US. This means the winners of the last few years–stocks that have the least to do with the domestic economy–would continue to outperform. But a Biden victory? …I haven’t worked out fully what I think.

For now, though, the S&P 500 results, by sector, for October:

Utilities +5.0%

Communication services +0.5%

Materials -0.8%

Financials -1.1%

Industrials -1.5%

S&P 500 -2.8%

Consumer discretionary -3.0%

Staples -3.0%

Real Estate -3.4%

Healthcare -3.8%

Energy -4.7%

IT -5.2%.

To my mind, October looks a lot like September, only with a sharper decline of the IT sector relative to the rest of the market. On the one hand, one could argue that the outperformance of IT so far this year has been so substantial that some giveback must inevitably come. On the other, IT is at the heart of what I’ve been calling the capital flight trade. Hmm.

October 1, 2020

Day to day movements in stocks are usually described as random. I don’t think that’s quite true, but it’s a useful simplification. And it’s at least true that it’s very hard to predict/imagine what the market will focus on tomorrow.

Stocks in the Us, however, almost always sell off in September, as mutual funds prepare to make distributions to shareholders post their Halloween yearend. That may not be the sole reason for this year’s September decline, but I think it has to have contributed something to it.

For the month, the S&P 500 fall by 3.9%, although a fruitful summer left it at +8.5% for the quarter. The S&P returns by sector are as follows:

September 2020

Materials +1.1%

Utilities +0.8%

Industrials -0.8%

Staples -1.8%

Healthcare -2.3%

Real estate -2.5%

Russell 2000 -3.5%

Financials -3.7%

Consumer discretionary -3.7%

S&P 500 -3.9%

IT -5.4%

Communication services -5.7%

Energy -14.6%

Yes, a down month, but basically a tech-led decline (at a 2% weighting, Energy is a non-factor). Even the Russell 2000 (mid-sized domestic companies serving primarily domestic customers) outperformed. Notably the leading sector is Materials, due, I think, to the strength in residential construction as workers migrate away from cities.

3Q 2020

Consumer discretionary +14.9%

Materials +12.73%

Industrials +12.0%

IT +11.7%

Communication services +10.8%

Staples +9.6%

S&P 500 +8.5%

Healthcare +5.4%

Utilities +5.2%

Financials +3.8%

Real estate +1.2%

Energy -20.9%.

Comparing 3Q with 2Q below, two things jump out to me.

The huge swings in Energy suggest short-term focused market players see this as a sector that can be traded aggressively. I don’t have any great desire to do this myself, but this would make sense for anyone with deep knowledge of oil and gas plus a flair for guessing how wounded companies will restructure and combine with one another.

The second is that the market is already broadening out to consider areas that will prosper as the economy starts to move back to normal.

September 1, 2020

Labor Day, which marks the traditional end to summer trading doldrums on Wall Street and the resumption of more robust market activity, is a week away. My quick look a trading volume data underlines what we all already know–there was no summer break this year. Even August, typically the sleepiest summer month, showed strong volumes and a 7.0% gain for the S&P 500 (capital changes only). That return breaks out by sector as follows:

IT +11.8%

Communication services +11.0%

Consumer discretionary +9.3%

Industrials +8.3%

S&P 500 +7.0%

Russell 2000 (mid-cap, US economy-centric) +5.5%

Staples +4.6%

Materials +4.2%

Financials +4.1%

Healthcare +2.6%

Real estate -0.1%

Energy -2.1%

Utilities -3.1%.

Note: I’ve added in italics the performance of the Russell 2000. The R2000 is a reasonable proxy for stocks closely linked with the ups and downs of the US economy. It has been severely underperforming other indices since early 2018. So far in 2020, it’s down by 6.6%. This compares with a ytd gain of 8.6% for the S&P, half of whose earnings come from abroad, and a whopping 30.4% rise for the global tech-heavy NASDAQ.

Two things jump out to me from this month’s figures, as well as from comparing them with those from the earlier months of 2020–back into 2019, as well.

–The first is the tenacity with which the market continues to shun the sectors most closely tied with the overall health of the US economy–Industrials, Materials, Financials, Real estate, Utilities. No sign of a counter-trend rally, even though the NASDAQ is +44% over the past two years and the R2000 is -9%– and despite the fact that the long time period and the huge performance differential both suggest one is more than overdue. The market is saying–no, shouting–that there’s something desperately wrong with the US economy. Yes, Trump’s incompetent handling of the pandemic is part of the reason. But what I’ve been calling “capital flight” had been going on for a year+ before that.

–Secondly, investors are beginning to diversify away from NASDAQ in a small way. That’s how I read the recent strength of Consumer discretionary. I see this more as a statement of portfolio managers’ fears about the riskiness of NASDAQ than the positive allure of consumer stocks, though.

One other factor: I don’t see worry about dollar weakness being factored into domestic portfolio managers’ current equity positioning. My experience has been that currency is not top-of-mind stuff for US-only managers, however. Personally, I find it hard to imagine plausible circumstances in which the dollar will be strong.

August 3, 2020

All of the press recently has been about the fabulous performance of the FAANG stocks, Facebook, Amazon, Apple, Netflix and Google. The July reality, however, is a little different, though. The S&P 500 gained 5.5% last month. FB was up by 6.8%, AMZN by 9.9%, AAPL by 16.7%. GOOG gained a mere 3.1%, though, and NFLX barely remained in the plus column, with a +0.7% showing.

The sector breakout of returns for the month shows an even tighter range, as the list below shows.

Consumer discretionary +9.0%

Utilities +7.7%

Materials +7.0%

Staples +6.8%

Communication Services +6.5%

IT +5.6%

S&P 500 +5.5%

Healthcare +5.2%

Industrials +4.3%

Real estate +3.9%

Financials +3.5%

Energy -5.4%

Energy continues to march to its own drummer–moved in today’s world not only (as usual) by changes in the oil price but also by shifting perceptions about the long-term prospects for fossil fuels as well as Big Oil’s willingness to adjust.

That sector aside, the rest are clustered surprisingly closely around the index. Several factors might be involved: the very high apparent valuations of tech issues, the question of whether domestic names will ever get off the floor and worries about Trump’s increasingly erratic and destructive behavior. What I don’t think the market is paying much, if any, attention to so far is how the stocks will play out if Trump is defeated in the November election. The issue: how the country will repair the immense economic and social damage Trump has done so far. That is to say, when and how will the hugely stimulative fiscal and money policy needed to rescue the nation from Trump’s incompetence be reversed? In particular, how closely will the process resemble Japan 1989?

July 1, 2020

The US stock market continues to perform in roller coaster fashion, driven in large part by Trump’s tragically destructive handling of the coronavirus in the US. Equities rallied sharply in April and May, as legislators voted trillions of dollars in spending to offset the COVID-induced economic slump. At the same time the market also began to rotate away from secular growth stocks with global reach toward US-focused business cycle sensitives.

But both the rise and the rotation were stopped in their tracks as, under pressure from Trump, the South and Midwest reopened prematurely. At Trump’s urging, partisans in these state also showed their fealty by ignoring medical safety protocols, i.e., social distancing and wearing face masks. The result has been an upsurge in new infections rather than the continuing decline the rest of the OECD is experiencing.

The quarter ended on a bizarre note. Russia is apparently paying locals bounties to assassinate US soldiers in Afghanistan, something Trump has been alerted to but has done nothing to stop. On the contrary, he has been politicking with other world leaders for special favors for Russia despite this. How so? His handlers explain that Trump is functionally illiterate and that he throws temper tantrums to discourage people from telling him things he doesn’t want to hear–which apparently includes anything negative about Russia. So, yes, he got the information in writing and maybe orally, too, but it didn’t really register. So doing nothing is okay. Shades of his Atlantic City casino disaster.

S&P performance: -4.0% year-to-date; +20.0% during 2Q; +1.8% for June. Sectoral breakout as follows:


IT +7.1%

Consumer discretionary +4.9%

Industrials +1.9%

Materials +1.9%

S&P 500 +1.8%

Real estate +1.0%

Financials -0.5%

Communication Services -0.6%

Staples -0.7%

Energy -1.4%

Healthcare -2.5%

Utilities -5.0%.

Most sectors are clustered around the index. What I find most notable are the strength of Consumer discretionary, which I take to be an expression of optimism that the worst of the pandemic is over. This is a sector to keep an eye on this month.


Consumer discretionary +32.7%

IT +30.1%

Materials +25.3%

Energy +20.7%

S&P 500 +20.0%

Communication services +19.6%

Industrials +16.4%

Healthcare +13.1%

Real estate +12.3%

Financials +11.4%

Staples +7.3%

Utilities +1.8%.

This is a rebound quarter. Again, Consumer discretionary is a notable winner. Energy is deep in the plus column, as well, but here the issue is recovery from arcane oddities in commodities markets and in ETF-land, which conspired to turn the domestic crude oil price negative (meaning sellers paid buyers to take the oil) for a short while. Utilities are again deep in last place.


IT +14.2%

Consumer discretionary +6.6%

Communication services -1.0%

Healthcare -1.7%

S&P 500 -4.0%

Staples -7.1%

Materials -8.0%

Real estate +10.0%

Utilities -12.6%

Industrials -15.5%

Financials -24.6%

Energy -37.0%.

I read these results in two ways. If I were simply an index holder, I might think this was a ho-hum half year. By sector, however, the numbers show a market markedly affected by the pandemic, both in general and in the deeper tragedy Trump has engineered in the US. For Energy, the issues are the lack of a driving season this year, as well as an accelerating shift to renewables and bankruptcies among highly leveraged shale wildcatters. I think the worry for Financials is a specifically American one, given the unusual severity of the pandemic here: how big will loan losses be? The market seems to be betting that they’ll be far worse than the banks want to acknowledge.

The two top winners are also interesting. My own portfolio has been driven by the idea that a big attraction of IT is that many firms have the option of relocating to other countries if voters affirm the white racism and total economic incompetence of the current administration. Kind of a cross between 1980s Mexico and 1930s Germany. The resilience of Consumer discretionary doesn’t fit that story at all. So I’ve got to consider whether to broaden my reach to include the domestic consumer, or maybe globally-oriented consumer names.

June 1, 2020

I’m finding May a hard month to describe in a few words.  Let’s start out by looking at numbers instead.

May                ytd          last 12 months

NASDAQ                 +4.4%             +5.4%            +23.8%

S&P                         +4.5%             -5.8%              +9.2%

R2000                     +6.9%            -16.0%              -5.7%

Q:  where’s the pandemic in the numbers?  A: in the Russell 2000?   …but steady underperformance of stocks closely linked to the rhythms of the US economy, like those in the R2000, has been the hallmark of the Trump administration.

I think the pandemic is in the enormous ytd spread between NASDAQ and the R2000.  The absolute numbers are only as good as they are, in my view, because of: enormous worldwide fiscal and money stimulus to offset the negative economic impact of the virus; and the fact that, ex Trump, world leaders have risen to the challenge of dealing with the health menace.

The May numbers also show significant outperformance of the R2000 during the month, prompted mostly by valuation I think, accompanied by a sharp selloff in many of the past year’s big NASDAQ winners.

I’d been thinking that a movement like this might last at least into the summer, with signs of the domestic economy reopening giving it more impetus.  Trump’s tweet of a slogan out of the segregationist 1960s approving of violence against black protesters slogan, however, threw the stock market back into “capital flight” mode as the month was ending.  The next few days will give a better indication about whether Trump has nipped the R2000 rally in the bud.

The S&P 500 gained 4.5% during May.  The sector breakout is as follows:

IT          +6.8%

Materials          +6.7%

Communication services          +6.0%

Industrials          +5.1%

Consumer discretionary          +4.9%

S&P 500          +4.5%

Utilities          +3.9%

Healthcare         +3.1%

Financials          +2.4%

Real estate          +1.7%

Staples          +1.4%

Energy          +0.7%.

All sectors were in the black for the month, with Materials and Industrials, two highly business cycle sensitive sectors, among the biggest gainers.

Mayday, 2020

After a sharp rally in April boosted the S&P 500 by 12.7%, the index ended the month basically unchanged from this time a year ago.  Massive fiscal stimulus, the promise of ultra-low interest rates as far as the eye can see plus evidence that COVID-19 has not overwhelmed the health care infrastructure in the hard-hit coastal areas are the main positive factors.  These overwhelmed two key negatives:  the dramatic economic slowdown resulting from the quarantine needed to achieve this result; and the president’s slow-motion mental self immolation.

By sector, the S&P in April played out as follows:

Energy          +29.7%

Consumer discretionary          +20.5%

Materials         +15.3%

IT          +13.7%

Communication services          +13.5%

S&P 500          +12.7%

Healthcare          +12.5%

Real estate         +9.3%

Financials          +9.3%

Industrials          +8.7%

Staples          +6.6%

Utilities          +3.2%.

Despite the debacle in the crude oil futures market at month’s end, Energy was the biggest winner for the month.  Defensives like Utilities and Staples–the latter also benefiting from shut-ins’ desire for comfort food–were left in the dust.  But reversal of prior form, although a market commonplace, isn’t the important story here.

Look at year-to-date performance:

IT           -0.2%

S&P 500          -1.9%

Healthcare          -2.2%

Consumer discretionary          -3.1%

Communication services          -6.1%

Staples          -7.6%

Utilities         -11.5%

Real estate          -12.4%

Materials          -15.4%

Industrials          -21.1%

Financials          -26.0%

Energy          -36.5%.

Other than IT, every sector is an underperformer, year to date.  Yes, Energy rallied fiercely in April.  But it remains mired deeply in last place so far in 2020   …and the rally came despite nothing but bad news for the oils in April.  More significantly, I think, Financials, Industrials and Real Estate all made virtually no move up the rankings.  In contrast, IT and Healthcare remained atop the leaderboard despite their prior months’ strong showing.  I think that’s the important information in the April numbers.

For the moment, my guess is that the tidal wave of government money being poured over the economy will be the most important factor keeping stocks moving sideways to up.  The greatest danger I see to the market is from dysfunction in the administration in Washington.

There’s been talk on Thursday, for instance, that Donald Trump is considering ordering a default on US Treasury bonds held by China, as punishment for having somehow unleashed COVID-19 as an anti-US weapon–as if defaulting on current debt will make trillions of dollars in new borrowing needed to carry out stimulus easier to do. That’s after saying he’ll refuse to allow a Post Office bailout unless the PO destroys its only profitable business.  Then there’s the Drink Bleach recommendation.  And Trump’s refusal to accept the Navy’s finding that the aircraft carrier captain he relieved of command (destroying his career) for trying to protect his crew from the coronavirus (even though it’s an evil Chinese plot) should be returned to duty.  All very scary.  But the stock market continues, for now at least, to maintain its default stance that none of this matters.

April 1, 2020

Despite the fact it’s April Fool’s Day, the ugly numbers below are the actual results for the S&P 500 (capital changes only).  Let’s start with March:


Healthcare         -4.0%

Staples          -5.9%

IT          -8.7%

Utilities          -10.2%

Communication services          -12.2%

S&P 500          -12.5%

Consumer discretionary          -13.4%

Materials          -14.4%

Real estate          -15.4%

Industrials          -19.3%

Financials          -21.5%

Energy          -35.0%


IT          -12.2%

Healthcare          -13.1%

Staples          -13.4%

Utilities          -14.2%

Communication services          -17.2%

Consumer discretionary          -19.6%

Real estate          -19.8%

S&P 500          -20.0%

Materials          -26.6%

Industrials          -27.4%

Financials          -32.3%

Energy          -51.1%.

Pretty ugly!

The sector positions are roughly the same for March and for 1Q.  Among the losers, Energy stands out, having lost just over half its value during the quarter.  This is mostly  due to the kamikaze-like price war launched by Saudi Arabia, with a pinch of too much high-cost (in a $20 a barrel oil world anyway) fracked output and too much financial leverage.  There’s also the perception that the big Americans are behind the curve in reinventing themselves as non-fossil fuel energy firms.  Energy is a tiny sector, now more so than ever, at 2.6% of the S&P.  Still, ex-Energy the S&P would have been about 1.5 percentage points higher for 1Q.

Financials clipped about the same from the index, even though it fell far less, because this sector is big, making up about 11% of the total.  The worry here is how/whether customers will repay their loans, not the banks’ solvency.  That’s unlike 2008, when they came close to destroying world commerce through pervasive loan fraud.

On a traditional conceptual basis, IT is very highly cyclical and therefore should underperform in a downturn.  The sector is mainly software today, not the old school chip fabs.  In addition, it’s the best safe haven against the deeply corrosive effects of the administration’s economic policies.

Staples is also enjoying a rare period in the sun, as consumers sacrifice health and taste in favor of foods that will last a month of quarantine.

Where to from here?  I’m not sure.  That’s partly because I’m not sure how to navigate a pandemic, but mostly because the heartless incompetence radiating from Washington has already deepened and lengthened the coronavirus’s damaging effects.  While we wait, though, we can do something as investors;  we can try to sort out what businesses will bounce back stronger than ever once this ends from the ones who won’t survive.

March 2, 2020

World stock markets took a real beating late in February.  For the S&P 500,  the loss was -8.4%.  This followed January where the index was basically flat.  A breakout of sector performance for February and year-to-date is as follows:


Communication services          -6.3%

Real estate          -6.5%

Healthcare          -6.8%

IT          -7.5%

Consumer discretionary          -7.7%

Staples          -8.2%

S&P 500         -8.4%

Materials          -8.7%

Industrials          -9.6%

Utilities          -10.4%

Financials         -11.3%

Energy          -15.3%

Year to date

Industrials          -3.4%

IT         -3.8%

Utilities          -4.4%

Real estate          -5.3%

Communication services          -5.7%

Consumer discretionary          -7.2%

Staples          -8.0%

S&P 500          -8.6%

Healthcare          -9.5%

Financials          -13.8%

Materials          -14.3%

Energy          -24.7%.

Maybe because it’s an election year, politics has played a role in the explanations offered by financial commentators for the current weakness.  I don’t think that’s what’s going on.  (Regular readers will know that I think Donald Trump’s white racism and management incompetence are doing significant long-term damage to the US economy (cutting growth prospects in half?), but my reading of stock prices tells me this is widely recognized and has been being priced into stocks for at least the past year.)

COVID-19 is another, although to my mind the scariest thing about the illness is not the virus itself but Donald Trump flashing the ineptitude that marked his real estate career.  But here the stakes are higher than being stuck holding a Trump product like dud DJT securities or a “50th floor” penthouse in a 40-story building.  Still, I think the real COVID-19 issue for investors is how to price in the possible loss of, say, three months revenue for affected stocks.

To my mind, the three key financial factors in the sharp decline are:

–the S&P 500, buoyed by ultra-low interest rates, cyclical strength overseas and structural change in tech, gained more than 30% in 2018.  That’s triple the typical annual return for the index.  So we were due for a pullback

–for Energy in particular, a COVID-19-induced slowdown has led to downward pressure on the oil price during the seasonally weakest part of the year–between the end of the heating season and the startup of the driving season, and a resulting collapse in oil and gas stocks (my guess is that Sanders’ desire to eliminate fracking plays almost no role in this)

–AI-driven trading, whose effect (purpose, too?) is to create short but very sharp cascades of buying or selling that seemingly come out of nowhere.  My sense is that these are valuation-based counter-trend actions. For now, at least, they are a fact of life.

Perhaps the most startling result of early 2020 is that the 10-year Treasury yield has fallen from 1.88% on January 2nd to 1.10% yesterday.  That’s little more than half the dividend yield on the S&P 500.  This kind of stock vs. bond pricing has occurred only rarely over the past half-century and even then only in the depths of recession.  To the degree that there’s any current link between stock and bond prices, the latter give support to the former.

What I take out of the selloff to date is the negative side–poor performance of Materials, Energy and Financials.  The first two tend to prosper when world economies are booming.  The third does well when interest rates are rising.  My hunch is that all three will continue to underperform.

Airlines, cruise ships and hotels–all highly operationally and financially leveraged industries–are among the biggest losers from COVID-19.  At some point it will be worthwhile to sort through them.  I don’t feel any urge to do so right now.  For anyone interested, I think the first point of analysis must be whether they are generating enough cash to meet their financial obligations.

February 3, 2020

The S&P 500 faded in the closing days of January as word of the spread about the latest coronavirus to emanate from China.  The S&P ended the months slightly in the red on a capital changes basis–and just a tiny bit above zero in total return.

There was plenty of differentiation by sector, however.  The results are as follows:

Utilities          +6.6%

IT          +3.9%

Real estate          +1.4%

Communication services          +0.7%

Consumer discretionary          +0.6%

Staples          +0.2%

S&P 500          -0.2%

Industrials          -0.5%

Financials          -2.8%

Healthcare          -2.9%

Materials           -6.2%

Energy          -11.2%.

The big winners for the month were Utilities and IT.  How curious to see that combination on top!  Of course, January is usually a difficult month to interpret, since the waters are often muddied by yearend maneuvering by big institutional investors in December.  Still, three of the top six performers are defensives vs. only one–Healthcare–underperforming.

The laggards are thematically clearer, as well:  losers Energy, Materials and Industrials are the most highly sensitive to the economic cycle.  Their message is: don’t bet on very robust economic growth this year, the same signal the S&P has been sending throughout 2019.

I don’t see any reason to think this pattern will change, other than through inevitable valuation-based (typically short-lived) counter-trend movements.   If that’s correct, sideways is my best guess for the direction of the S&P.

Let’s assume the coronavirus runs its course during the first half of 2020 with the now-projected mild, flu-like fatality rate of 2% or so of those infected.  If so, I draw three conclusions:

–because of lower than anticipated growth, interest rates will stay low for longer than expected (hence the weakness in Financials, which benefit from rising rates).  I think this is the main thing the S&P is saying

–the slowing of the US economy vs the rest of the world will be obscured until the summer, and

–the negative effect on the US of clueless White House economic policies will be harder to see, as well, decreasing the chances that positive changes will happen.  As I read it, Mr. Trump’s history is to do the worst economic harm to the people who trust him most (stock- and bondholders of DJT are a prime example, as are the small creditors of that ill-fated casino venture).   So the Midwest will likely continue to trail the rest of the country.  From a stock market point of view, this would imply more money flowing into non-hardware tech.

My biggest worry at the moment:  is TSLA a warning about out-of-control speculation?  I don’t know, but this is something to watch.

January 2, 2020

Happy New Year!!!

2019 was a surprisingly strong year for the S&P 500, which returned 31.5% for the twelve months, including dividends that added 2.6% to the 28.8% capital change.  A quarter or so of this is bounceback from the steep market swoon of December 2018.  Even so, however, the results were more than satisfactory, particularly in a time of decelerating eps growth.

What makes the numbers even more remarkable is that Washington was busy throughout last year putting policies in place to retard the expansion of the workforce and slow the growth of the domestic economy, all the while heavily favoring commodity-like sunset firms over industries of the future.  Perhaps the most “positive” accomplishment of national politicians in 2019 was the last minute decision not to impose tariffs that experts  guess would have clipped a full percentage point (i.e., half) from economic growth this year.

What powered stocks upward, then?  PE expansion from 19.6x a year ago to 24.2x now.  That’s a 23.5% rise.

More about this below, but first the sector breakout of returns (capital changes only) for December, 4Q19 and full-year 2019…


Energy          +5.8%

IT          +4.4%

Healthcare          +2.4%

Utilities          +3.1%

S&P 500          +2.9%

Materials          +2.8%

Consumer discretionary          +2.7%

Financials          +2.5%

Staples          +2.0%

Communication services          +1.9%

Real estate          +0.8%

Industrials          -0.2%.


IT          +14.0%

Healthcare          +13.9%

Financials          +9.9%

Communication Services           +8.6%

S&P 500          +8.5%

Materials          +5.8%

Industrials          +5.0%

Energy          +4.4%

Consumer discretionary          +4.1%

Staples          +2.8%

Utilities          -0.04%

Real estate          -1.3%

full-year 2019

IT          +48.0%

Communication services          +30.9%

Financials          +29.2%

S&P 500          +28.9%

Industrials          +26.8%

Consumer discretionary          +26.2%

Real estate          +24.9%

Staples          +24.0%

Utilities          +22.2%

Materials          +21.9%

Healthcare          +18’7%

Energy          +7.6%.

My take?   Sectors like Materials, Energy and Industrials, which are beneficiaries of a booming economy, fared the worst last year.  So too Consumer discretionary, which tends to outperform in even in times of tepid growth.  The big winner was IT, a sector that’s a bet against the domestic economy/current economic environment, in favor of structural change and global reach, without the need to have tangible assets in any given country.

Not an uplifting read.  If that’s anywhere near correct, one might argue, how did the S&P do as well as it has in 2019?  To my mind (this is basic economics), the simple answer is that there’s no demand for stocks.  The real demand driver is the need for liquid forms of saving/investment–meaning stocks + bonds + cash.   Currently, returns on fixed income are at or below zero after adjusting for inflation.  In many parts of the world, these returns are also negative in absolute terms.  Financials, which benefit from rising rates, and which have been on a tear in the US recently, may be signalling (I think they are) that we’ve passed the cyclical low for rates–implying losses for fixed income holders as/when rates begin to rise.  So stocks are the best game in town.

Regular readers will know that I think Washington, led by the current administration, is making policies that will severely damage the US economy over the next generation if they are kept in place.  So I’ve got to worry that my reading is biased by this analysis.  More about strategy for 2020 in the main blog over the next few days.

December 4, 2019

Another month, another slow-off-the-mark effort on my part to collect market data by sector.  So, like last month, the data are not 100% accurate, although still, I think, usable to analyze what happened with US stocks during November.  The S&P 500 returns by sector are (approximately) as follows:

Healthcare          +4.6%

Financials          +4.2%

IT               +3.8%

Communication services          +3.0%

Industrials          +2.5%

S&P 500          +2.5%

Materials          +1.9%

Staples          +1.4%

Energy          +1.2%

Consumer discretionary          +0.4%

Utilities          -3.0%

Real estate          -3.6%.

A so-so month.  Given the lack of an end of the fiscal year selloff by mutual funds in October, however, +2.5% is arguably a very good result.  The overall picture the numbers convey is also what I think is actually the case–a US economy growing at around trend of 2% real plus another, say, +1.5% in inflation, meaning nominal GDP growth of 4%-.  That probably translates into 6% (?) profit growth for the domestic operations of US-listed companies.  No reason to celebrate, but no reason to panic, either.

One near-term caveat:  risk-taking appetite has so far been fed by unusually low interest rates–why else would a 4% earnings yield be attractive?  But rates are dangerously low, in my opinion.  That’s why I note the outperformance of Financials, which benefit from rising interest rates, so far this quarter, as well as the underperformance of Utilities and Real Estate, which do best when rates are falling.  This may simply be a short-term counter-trend movement.  It may also simply signal that Wall Street believes there’s no percentage any more in betting rates will drop further.  This last is what I think, so I’m not taking any portfolio action as this point.  But it’s worth keeping in mind the possibility that this could be an early warning signal that rates are set to rise.  Unless the economy is growing at a crazy-high pace, rising rates means falling stocks.

There is a second, more serious worry for the US economy and for stocks, in my view.  It’s not a today thing  …and it’s something no one is talking about.  I think the administration’s industrial and trade policy (if that’s the right word for what looks like a jumble of  ad hoc measures) will likely end up benefiting China at lot while doing equally large damage to the US.  A facile comparison would be that all Americans as citizens now hold a big chunk of a 21st-century version of DJT stock.  The analogy fails on two counts, neither of which alter the potential negative outcome .  It’s not clear to me what role Mr. Trump has in shaping his administration’s economics policies nor do I have a sense of how well he understands their ramifications.  In contrast, my reading about DJT makes me conclude that each move that company made was part of a deliberate strategy; here I see no overarching purpose.

November 6, 2019

The end of the fiscal year for mutual funds came and went on Halloween without much fanfare.  One exception–this year’s run of super-successful IPOs for loss-making tech unicorns came to an end, heralded by the failure of WeWork to list (and subsequent revelations of how close to insolvent the firm appears to be).  This triggered a selloff that has hit most of the newly-listed high fliers badly.  Interestingly, the arrival of the end of the mutual fund year has not ended the selling so far, as it usually does.

I’m compiling the following breakout of the sector performance of the S&P 500 for October a few days after the end of the month, when the data I normally use have already vanished into cyberspace.  Because of this, entries could be off by a tenth of a percent in some instances.  Even if so, relative performance, which is what we’re mostly interested in, is accurate.  The results are:

Healthcare          +5.0%

IT            +3.9%

Communication Services          +2.8%

Financials          +2.3%

S&P 500          +2.1%

Industrials          +1.0%

Consumer discretionary          +0.3%

Materials          0%

Real estate          -0.2%

Staples          -0.3%

Utilities          -0.8%

Energy          -2.5%.

Overall, the index looks to me to be meandering, with the outperformers of September under performing and vice versa.  The one sector that stands out, however, is Financials.  Banks typically do well when interest rates are rising, so it’s understandable that they’ve been laggards while government policy has been slowing the economy and world-wide interest rates have been falling.  An optimistic view would be that the current outperformance is signalling that this phase is over.  A more sober view would be that they’ve become cheap enough that it’s worth holding them even if it may take some time before their fundamentals improve.  In either case, the fact that the market is gravitating toward the biggest defensive sector suggests that the traditional yearend rally may be as tepid as the September-October selloff that usually precedes it.

October 1, 2019

During September the S&P 500 (on a capital changes basis, meaning without counting the index yield of around 2% annually) rose by 1.7%–unusual in a month during which active mutual fund managers have tended to be sellers.

For 3Q19, the S&P rose by 1.2%.  Ytd, the index is ahead by 18.7%.  That figure is unusual, too.  The S&P dropped down an AI-dug hole late last year, losing 14.0% during 4Q18–  -9.2% of that during December.  This offset first-half gains; the index fell by -6.2% for full-year 2018.  To a great extent, then, the gains of 2019 represent a rebound from a wickedly bad 4Q18.  Over the trailing 12 months, the S&P is up, but only by just over 2%.

Looking at sector performance:

September 2019

Financials           +4.5%

Utilities          +4.0%

Energy          +3.6%

Materials          +2.9%

Industrials          +2.9%

S&P 500          +1.7%

IT         +1.4%

Staples          +1.3%

Consumer discretionary         +0.7%

Real estate          +0.5%

Communication Services          +0.4%

Healthcare          -0.3%.

For many sectors, September marks a reversal of the performance trend in place for most of the year.  Healthcare is a notable laggard over all periods, though, as is Communication Service.  On the other hand, Energy has had an uncharacteristic moment in the sun in September.


Utilities          +8.4%

Real estate          +6.9%

Staples          +5.4%

IT          +2.97%

Communication Services          +1.8%

Financials          +1.4%

S&P 500          +1.2%

Industrials          +0.5%

Consumer discretionary          +0.2%

Materials          -0.7%

Healthcare          -2.7%

Energy          -7.3%.

Ex Healthcare and IT, this is a classic defensive posture.

2019, ytd

IT          +29.9%

Real Estate          +26.6%

Staples          +20.6%

Utilities          +22.3%

Consumer discretionary          +21.2%

Industrials          +20.8%

Communication services          +20.5%

S&P 500          +18.7%

Financials          +17.6%

Materials          +15.2%

Healthcare          +4.2%

Energy          +3.1%.

Without Healthcare, the index would be up by +21.4% ytd; w/o IT, around +16%.

I’m finding the financial waters to be particularly muddy at the moment.

I think the spectacular failure of the WeWork IPO marks an end to wildly high valuations for early-stage companies debuting on the US stock market.  This has triggered a downward rerating of those already trading.  These are, however, at least to my mind, among the most interesting stocks on Wall Street, both because they are in industries of the future and they are relatively insulated from the highly growth-inhibiting economic policies emanating from Washington.  My sense is that we’re pretty far along in the rerating process already, but that’s just a guess.

Negative-yielding bonds in the EU and Japan (a sign of economic malaise) are creating downward pressure on fixed income throughout the world–making stocks relatively more attractive as a place to put money.

On the other hand, the US, the UK (maybe continental Europe as a whole, as well) and Japan all seem to have a quixotic determination to restore a bygone era of domestic prosperity, or at the very least to preserve the wealth and power of the former elites, and to do so by reviving industries of the past.  Heads in the sand is not a pretty, nor a sensible, picture, in my view.

To my mind, the craziest place is the UK, which proposes to unilaterally sever ties with its major trading partner, the EU, in less than a month.  The idea is that this will somehow restore the country to its 19th-century prominence.  Implosion is a more likely outcome, I think.  Maybe make a note to sort through the rubble sometime next year.

The US, a much more dynamic economy with arguably saner goals, is hamstrung by an administration full of economic illiterates whose policies are, as far as I can see, achieving the opposite of their stated goals.  The anti-education and white racism they profess doesn’t help, either.  It seems to me domestic problems are being compounded by reduced government support for education and a continuing failure to make much of an effort to retrain workers displaced by changing technology (over the last thirty+ years, the US has spent about a third of the OECD average on retraining).

Japan has fabulous technology and a highly literate and skilled–if aging–population but has been in the grip of zaibatsu samurai families for as long as I’ve been watching.

I find it hard to imagine stocks running away to the upside, given uncertain economics, a PE of 20x+ and only so-so earnings growth.  On the other hand, bonds and cash seem much less attractive alternatives.  So sideways is my default guess, with growth companies continuing to do better than value and big better than small.

September 2, 2019

I’m not sure what happened to my analysis of July, but here’s August.

The macroeconomic strategy of the administration in the US, if there is in fact any strategy, is becoming more incoherent by the day.  That in itself is scary (more about this in a post later in the week).  Arguably, the US macro “plans” are looking a lot like those Mr. Trump came up with when he decided to revive the Atlantic City high roller market– apparently not realizing (despite being born in NYC and living most of his life here) the that the northeastern winter is cold and almost no one goes to the Jersey shore for maybe a third of the year.  We know how the saga of DJT played out.

The election of “British Trump” and the impending lunacy of a hard Brexit, the continuing slow Japanization of the rest of the EU and the dots connecting those two regions to the US added to the unease the stock market was feeling as many seasoned Wall Street professionals (of the dwindling number still employed) headed out for a month at the beach.  Inability to see any endgame behind the tariff war just compounds the uncertainty.

During August, the S&P 500 fell by 1.8%.  The character of the market changed as well.  The sector breakout is as follows:

Utilities          +4.7%

Real estate          +4.6%

Staples          +1.6%

Healthcare          -0.7%

Consumer discretionary          -1.4%

Communication services          -1.5%

IT          -1.7%

S&P 500          -1.8%

Industrials          -3.0%

Materials          -3.1%

Financials          -5.1%

Energy          -8.8%.

Among the relative losers, Financials are a group that benefits from rising rates and gets squeezed when they are falling.  Industrials, Materials and Energy are the most highly sensitive sectors to the business cycle.  On the other side, the most defensive sectors performed the best.

During the month, Mr. Trump increased his public attack on the independence of the Federal Reserve.  He also asserted that Congress gave the president in 1977 the power (used by President Carter to impose sanctions on Iran) to declare a national emergency, suggesting he might do so to prohibit all US firms from doing any business with China.  They might also be required to withdraw all their assets from that country.

The clear message I get from Washington is that the future returns from plant and equipment investment in the US can’t be forecast with any degree of certainty.  This explains why investment in new plant and equipment in the US is so weak.  It also explains why the stocks of companies that are involved in physical manufacturing have been underperformers.  I expect this pattern will continue until more clarity comes from Washington.   Growth investors have been taking refuge so far in companies whose value comes from intangible assets, particularly those making cloud-related software.  My sense, however, is that early investors in this area have begun to take profits.  Perhaps the brightest area I see is the less-affluent consumer, the Walmart and dollar store shopper, who has recently been spending for the first time in many years.  

September and October are usually weak months for stocks, as mutual funds sell to adjust their capital gains positions for their fiscal year end on Halloween.  I find it hard to imagine stocks other than bond proxies doing more than limping to the mutual fund finish line in the current climate.  The only saving grace I can see is that index gains from last November to now are not that large, so tax-related selling is likely not to be too severe.

July 1, 2019

…to start (sorry)

…an observation/pet peeve

The S&P 500 rose by 17.4% during the first half.  Financial tv commentators, and to a lesser extent, the financial press continue to point out that this is the best first half for the index in many years.  That’s true.  But the S&P fell by 9.2% in December 2018, providing an unusually favorable starting point for 2019.  For the seven months 12/18 – 6/19, the S&P is up a much more pedestrian +6.5%.

I used to think of financial television shows as a forum where relatively clueless personalities interviewed experts who were actually involved in the investment industry on Wall Street (experts were more than willing to oblige because, oddly enough, a tv appearance is a much stronger endorsement for an investment product than just about anything else).  Nowadays, however, the personalities, still by and large clueless, mostly interview each other in a farcical imitation of ESPN sport shows.  Entertaining, maybe, but not a great way to get market information any more.

the numbers

The S&P 500 was up by 6.9% in June, providing about a third of the six-month return for the index.  By sector, this result breaks out as follows:

Materials           +11.5%

Energy .         +9.1%

IT .         +9.1%

Industrials .         +7.8%

Consumer discretionary  .        +7.6%

S&P 500          +6.9%

Financials .         +6.6%

Healthcare  .        +6.5%

Staples          +4.8%

Communication Services .        +4.3%

Utilities          +3.1%

Real estate          +1.3%.

Other than the weakness in Communication services, all the most economically sensitive sectors were outperformers, the defensives relative laggards.


IT .         +26.1%

Consumer discretionary .         +21.0%

Industrials .         +20.2%

Real Estate .         +18.5%

Communication services           +18.3%

S&P 500          +17.4%

Materials .         +16.0%

Financials          +15.9%

Staples          +14.5%

Utilities .         +12.8%

Energy .        +11.3%

Healthcare          +7.1%.

During the selloff last December, Staples, Industrials and Energy were the worst-performing sectors.  All other things being equal, one would expect those three to show the strongest rebound.  That didn’t happen.  Staples and Energy, two sectors tied to the health of the world economy, continued to underperform.  Industrials, which, despite its name, serves mostly the domestic Consumer Discretionary sector, bounced back.  I think this is an interesting/important difference.

There’s a gigantic spread between the best-performing and worst-performing sectors, IT and Healthcare, as well as an unusually large difference between them and the index.  This suggests that despite very confusing signals from the world economy–and from Washington, too–investors expressed very strong conviction in their buying and selling.

The sense in all this?  Despite tariff wars and the president’s worryingly/increasingly erratic behavior, Walmart and the dollar stores are signaling that economic recovery has finally reached the heartland of the US.  So far, tariffs have negated the positive effects of the tax cut stimulus but done little other aggregate harm.  While this is a bad time to be a supplier of tech hardware to China, cloud software companies continue to prosper.  Parts of IT and Consumer discretionary may continue to provide at least near-term places to hide from what I think are very destructive economic policies that continue to emanate from Washington.

June 3, 2019

It isn’t every month that Washington opens a trade war on two fronts at the same time. I suspect it’s even more unusual to find trade sanctions imposed to achieve aims that have nothing directly to do with trade–or to find new tariffs imposed on a country before a just-completed major trade agreement has been ratified by Congress.  Yet, here we are.

First, the numbers…

During May, when both bombshells fell, the S&P performed by sector as follows:

Real estate          +0.9%

Utilities          -1.3%

Healthcare           -2.6%

Staples          -4.0%

Communication services          -6.0%

S&P 500          -6.9%

Financials          -8.9%

Consumer discretionary          -7.7%

Industrials          -8.1%

Materials          -8.5%

IT          -8.9%

Energy          -11.7%.

The year-to date tally:

Real estate         +17.0%

IT          +15.7%

Communication services          +13.5%

Consumer discretionary          +12.4%

Industrials          +11.6%

S&P 500          +9.8%

Utilities          +9.4%

Staples          +9.2%

Financials          +8.8%

Materials          +4.0%

Energy          +1.9%

Healthcare          +0.6%

I usually avoid mentioning the S&P 500 Value and Growth indices because of their weird construction but, for what it’s worth, the Growth index is up 12.5% ytd, after falling by 5.5% in May.  The Value index is up 6.8% ytd, after falling 7.9% last month.  Arguably, a growth index should be up more than its value counterpart in a rising market.  But it should also be more defensive (i.e., fall less) in a declining one.  That hasn’t happened here.

Of the two international disputes, the one with Mexico seems to me to be the less significant and the more likely to be resolved in short order–because the tariffs Mr. Trump is proposing are so immediately damaging to the economy and to ordinary citizens who might otherwise be willing to vote for him.

The issue with China, it seems to me, is the more serious and long-lasting. This is a contest for economic and social preeminence in the world–a position currently held by the US.  As far as I can see, Washington’s tactics for staying on top have two prongs: to retard China’s progress by preventing its innovative products from being accepted in world markets (think:  Huawei); and to bolster the US by restricting the number of foreign scientists who can come to work here and using tariff barriers to lure back low-value-added manufacturing that left for lower labor-cost countries decades ago.  This seems similar in thinking, although not necessarily in particulars, to the belief of UK Brexiters that severing ties with its largest trading partner will restore Britain to its 18th century glory.

Although Washington seems not to have a coherent long-term strategy and to be making policy up as it goes along, one overarching theme seems to be to protect the status quo.  If so, investors face a number of important questions:  how to gain exposure to innovation, especially innovation in China; how badly ad hoc tariff imposition hurts the reputation of the US as a safe place to invest; to what degree current policies are aberrations or instead the early symptoms of a British-like descent into a dream world where the UK still rules the waves.

In the latter case, we also have to contemplate lower trend earnings growth and lower PE multiples for US stocks.  Even in this gloomy view, however, I don’t think multiples start to contract in any meaningful way.  Rather, the immediate impact of Washington craziness on both sides of the aisle is to put a lower cap on multiples than we’ve been used to in the recent past.

May 1, 2019

Another up month for the S&P!  Financial talking heads continue to rave about 2019-to-date–conveniently forgetting about the absolutely awful end to last year.  What’s more interesting, to my mind, though less commented on, is that the market seems to be resolving in a positive way two key issues:

–would S&P earnings in 2019 be as weak as so-so GDP forecasts had been hinting? The answer so far is “no.”  This is a combination of factors:  consumer spending, especially among the less affluent, is holding up well; areas of weakness, like housing/construction and autos, have little representation in the S&P; and for every bad AAPL there seems to be a good MSFT to offset the former’s earnings weakness.

–how would AI deal with the anniversary-ing of the positive effects of last year’s corporate tax cut, which is manifesing itself in an apparent loss of earnings momentum? Historically, such a deceleration is a really bad thing.  Again, so far, AI is proving smarter than I’ve been willing to give it credit for.  (In the eternal search for outperformance, this is probably a bad thing.  It implies that trading computers are getting clever enough to be more than just the dumb money.)

For April, the S&P posted a 3.9% advance.  By sector, that breaks out as follows:

Financials          +8.8%

IT          +6.4%

Communication services .         +6.2%

Consumer discretionary .         +5.7%

Industrials          +4.1%

S&P 500 .         +3.9%

Materials          +3.6%

Staples .         +2.3%

Utilities .         +0.9%

Energy .         0.0%

Real estate          -0.6%

Healthcare  .        -2.7%.

For IT, Communication services and Consumer discretionary April was a continuation of outperformance;  for Healthcare, Staples, Materials and Utilities it’s business as usual in the underperformance column.  For Financials it’s a positive reversal of recent poor form, based partly on valuation but mostly, I think, because earnings have been better than the market has been expecting.  Real estate and Energy changed direction in a negative way.

Two comments/observations:

–Financials are an unusually opaque sector.  Maybe better said, it’s an area that requires substantial specialist knowledge.  Most market participants don’t think the game is worth the candle (I don’ t believe my hands typed out that strange old saying!), so they stay with very simple models based on interest rate spreads.  In 1Q19, that turned out to be badly wrong.

–Energy is another area that demands considerable effort to master.  Again, the market judges that the effort won’t pay off.  I started out as an oil analyst.  I know I don’t know the ins and outs any more–but still enough to understand that the market is really clueless.  So this sector seems to trade in the short term on political headlines–almost always a recipe for disaster.  It’s hard otherwise to see how the sector is trading off on Wall Street just as we’re entering a period of seasonal demand/price strength.

Where does the S&P go from here?   My guess is sideways, with secular growth ideas continuing to outpace business cycle beneficiaries.  At some point, valuation differentials will cause a reversal of form, which–if it were to begin tomorrow–I would read as temporary    …and as a chance to upgrade portfolio structure in favor of secular growth.

April 1, 2019

Happy April Fool’s Day!  Despite the day, the numbers in this post are accurate.

By far the most April Fool-ish thing I can see about 1Q19 is the financial press commentary that the just-ended quarter provided the strongest S&P 500 performance of the past decade.  Yes, that’s correct, as far as it goes   …but what’s not mentioned by sensation-seeking headline writers is that this advance follows, and is a reaction to, but falls 3%+ short of recovering, the losses the S&P 500 suffered in 4Q18 (scroll down to see the damage by sector).

We are about 4% ahead of where we were last June, though.

Even the worst sector in the S&P during the first quarter, Healthcare, rose 6.1%.  Although in the absolute a healthy result, that outcome was 700 basis points less than the S&P gained.   However, Healthcare was an outperformer during 4Q18, losing 9% vs. a decline of 14% for the index.  In general, this is what one might expect of a defensive sector.  It’s the magnitude of the swings–presumably caused by AI-generated trading–that are jaw-dropping.

recent index results

The returns of the S&P by sector for the month and the quarter (capital changes, as usual, meaning without factoring in dividends) are as follows:


IT          +19.7%

Real Estate, Industrials (a tie)          +16.6%

Energy          +15.4%

Consumer discretionary          +15.3%

Communication Services          +13.6%

S&P 500          +13.1%

Staples          +11.2%

Utilities          +9.9%

Materials          +9.7%

Financials          +7.9%

Healthcare          +6.1%.

For the month of March:

IT         +7.4%

Real Estate          +4.5%

Consumer discretionary          +3.9%

Staples          +3.7%

Utilities          +2.7%

Communication services          +2.4%

Energy          +1.9%

S&P 500          +1.8%

Materials          +0.9%

Healthcare          +0.4%

Industrials          -1.2%

Financials          -2.8%.

If we were in older, simpler times, charting a course forward would be relatively easy:  lower the portfolio risk level by deemphasizing smaller, more speculative (meaning earlier-stage, with less earnings history to go by) names in favor of GARP (growth at a reasonable price = PE less than the growth rate), and by adding some value names for ballast.  That’s still going to be the right strategy, I think, but it will be a little harder to implement today.

Several issues:

–in an Internet- and Millennial-driven world, the value of physical assets, as well as of intangibles like brand names, becomes open to question.  So dependable value stocks are harder to find

–AI-driven daily volatility will likely remain high, but that’s now just the way it is.  To deal with this, I’m holding a larger cash balance than I have in the past but am otherwise, so far, taking no other measures to offset the bumpier ride

–because of the large positive effect of the Federal tax cut on eps in 2018, earnings comparisons in 2019 will be difficult.  In almost all cases, net earnings growth will decelerate; in many, earnings comparisons will be negative.  Humans would simply factor out the effects of tax rate change and look at operational growth–concentrating on, say, pre-tax comparisons.  Will AI do this?  I don’t know.  Again, though, other than mentally preparing for buying opportunities caused by willy-nilly selling as 1Q19 earnings are announced, I’m not doing anything to counter this possible development

–I don’t see any coherent strategy behind much of Washington’s economic policy.  Shutting down the government late last year revealed that Federal workers live much closer to the edge than I would have thought, with the result that halting their paychecks did   …and will continue to do…   much more damage to GDP than I had expected.  The Trump tariff wars appear to me poorly thought out and another source of unnecessary economic drag.  A sensible strategy would be to take out a fresh sheet of paper and rethink.  But there’s nothing in Mr. Trump’s weak business past to suggest he will do so.  So the difficult-to-decide question is how much more friendly fire will the economy take from the White House.

My conclusion, which may be too optimistic: figure the market will go sideways and overweight secular change beneficiaries, through some combination of ETF/mutual funds and individual stocks.  Deal with potential swings like those we saw in 4Q18 and 1Q19 by taking partial profits more quickly and keeping some extra cash on hand for tactical buying.

March 4, 2019

February was another positive month for the S&P 500, which rose +3.0% for the month.  Coupled with January’s gains, ytd the index has more than recouped its losses of December.  In typical memory-(fact-?)free fashion, the financial media have hailed this start have hailed this start as the est in close to two decades, forgetting 4Q18’s uncharacteristically weak performance.

The index performance by sector is as follows:

IT          +6.6%

Industrials           +6.1%

Utilities          +3.6%

Materials          +3.0%

S&P 500          +3.0%

Financials          +2.2%

Staples          +2.1%

Energy .         +1.9%

Healthcare          +1.0%

Real estate          +0.8%

Communication services          +8.0%

Consumer discretionary           +0.7%

Where to from here?  My, perhaps optimistic, guess is that we go sideways.  Overall corporate earnings growth momentum is already slowing as the one-time gains from the domestic corporate tax cut begin to appear as the standard against which current reported numbers are judged.  In addition, the ongoing quirky (read: weird) application of tariffs by President Trump, plus the failure of Congress to counter these questionable actions, are already reducing corporations’ desire to invest in the US.

Humans would disregard the first of the two.  It’s not clear–but we’re going to find out–that AIs will do the same.  It’s also possible that Washington’s heightened dysfunction will play itself out in dollar weakness rather than stock market decline.

If so, secular growth sectors will likely outperform economically sensitive.  Foreign-sourced earnings might also be worth another look.

February 2, 2019

The S&P 500 fell by -9.2% in December and rebounded partially in January by gaining +7.9% last month.  I’m writing “partially” because matching the index through the two-month period would leave one slightly more than two percentage points poorer  (because the gain comes off the lower base).

The stock market is much calmer than it was a month ago.  That’s because employment growth remains strong, corporate earnings are ok, the Fed has announced it is pausing raising rates (and contracting its balance sheet) for the moment, and the government shutdown is over.

The returns on the S&P for the month, on a capital changes basis, are as follows:

Industrials          +11.1%

Energy          +11.0%

Real estate          +10.7%

Consumer discretionary          +10.2%

Communication services          +10.1%

Financials          +8.6%

S&P 500           +7.9%

IT          +6.9%

Materials          +5.5%

Staples          +5.0%

Healthcare          +4.7%

Utilities          +3.4%.

For the twelve months ending in January, the sector returns break out like this:

Utilities          +7.2%

Real estate          +6.5%

Healthcare          +2.8%

Consumer discretionary          +0.4%

IT          -2.3%

S&P 500     -4.2%

Communication services          -7.4%

Staples          -8.0%

Industrials          -10.1%

Financials          -12.9%

Energy          -14.9%

Materials          -15.3%.

Two factors involved in these results:  the rough going for the S&P in early 2018 is beginning to drop out of the twelve-month numbers; the losers of December became the winners of January, and vice versa.  One exception is Staples, which remains in the investor doghouse.  Another note–Energy did well despite the fact that the winter it typically the seasonally weakest part of the year for crude oil pricing (not as much winter driving + the time it takes to refine and deliver heating oil to a retail customer means that demand is weakening as well).

Over the next couple of months, the economic headline grabbers will likely be Brexit and whatever next steps Washington takes in the trade war with China.  Absent the imposition of significant further tariffs, my guess is that the market moves sideways for a while.  My sense is that for a growth investor like me, the most important themes to consider won’t be these but rather:  the unintended long-term consequences of the restriction of world trade and the possible senescence of iconic companies like Apple, Tesla and Facebook.  What are the implications for the nature of work?  Where does the money now invested in fading stars find a new home?  How/when will trading robots factor considerations like these into stock prices?

More on this on the blog over the next few days.

January 2, 2019

Happy New Year!!!  (or …thank goodness 2018 is over!)

I think the best way to proceed in analyzing this hectic period is to start by laying out the sector performance of the S&P for the full year, the fourth quarter and the month of December.   In that order, the numbers are:

full-year 2018

Healthcare .         +4.7%

Utilities .         +0.5%

Consumer discretionary .         -0.5%

IT .         -1.6%

Real estate .         -5.6%

S&P 500          -6.2%

Staples .         -11.2%

Financials .         -14.7%

Industrials .         -15.0%

Communication services .         -16.4%

Materials .         -16.5%

Energy .          -20.5%.

What jumps out to me is that the strongest sectors are the least business-cycle sensitive ones–this despite the strong fiscal stimulus provided by the cut in the corporate tax rate, the continuing strong domestic economic numbers and the fact that domestic money policy is still stimulative (although much less so than previously).


Utilities .         +0.5%

Real estate .         -4.7%

Staples .         -6.0%

Healthcare          -9.1%

Materials .         -12.8%

Communication services .         -13.6%

Financials .         -13.6%

S&P 500 .         -14.0%

Consumer discretionary .         -16.7%

IT .         -17.7%

Industrials .         -17.7%

Energy .          -24.4%.

Two striking aspects of 4Q18:  the sharp fall in the market; and the continuing pattern of Healthcare/Utilities outperformance combined with Industrials/Energy underperformance.

December 2018

Utilities .         -4.3%

Financials .         -4.5%

Materials .         -7.2%

Communication services .         -7.4%

Real estate .         -7.9%

Consumer discretionary .         -8.5%

IT .         -8.5%

Healthcare .         -8.7%

S&P 500 .         -9.2%

Staples .         -9.5%

Industrials .         -10.8%

Energy .         -12.8%.

Several points:  the lion’s share of the absolute decline for 4Q18 occurred in December; my impression is that part of this is selling rolling from smaller firms to larger, more stable, companies (with higher index weightings) as the quarter progressed; the relative decline is centered in two highly cyclical industries.

To my mind, there is a notable disconnect between the current buoyant economy and the persistent, sharp stock market decline of 4Q18.  Historically the stock market has been by far the most reliable of the indicators economists use to forecast future performance of GDP.  On its face, the decline would seem to be presaging a sharp economic slowdown that could unfold this year.  However, today’s situation is more complex than normal, in my opinion.  If nothing else, how much of a possible2019 slowdown has already been discounted in the 20% fall in the S&P 500 between late September and Christmas (24% for the NASDAQ, 27% for the small-cap, US-centric Russell 2000)?

More in the blog tomorrow.

December 3, 2019

Finally an up month.  Just short of two weeks ago, the NASDAQ 100, which has been in the forefront of the recent decline, touched its February lows and bounced sharply above them.  This may well have been a favorable turning point in market psychology.

In any event, the November returns on the S&P 500 by sector are as follows:

Healthcare         +6.8%

Real Estate          +5.3%

Materials          +3.8%

Industrials          +3.5%

Utilities          +3.1%

Consumer discretionary          +2.6%

Financials          +2.6%

S&P 500          +1.8%

Staples          +1.7%

Communication Services          -0.7%

Energy          -2.2%

IT          -2.1%.

A majority of sectors outperformed during the month.  Another way of saying the same thing is that the underperformance is centered in two large-weight sectors:  IT and Communication Services.  Ex-IT, for example, the return on the index would have been +2.7%.  The real stars, in contrast, were Healthcare and Real Estate.  The former is a classic countercyclical; the latter is an interest rate-sensitive which has been a dreadful performer until just recently.

A reasonable question to ask is to what degree the selloff has restored some balance to valuations–in other words, have IT and Communications been beaten up enough to merit buying again (my personal answer is “yes”; for less aggressive investors, “we’re getting closer” is probably a better conclusion).

The one-year performance of the S&P through November:

Healthcare          +13.8%

Consumer discretionary          +11.2%

IT          +7.5%

S&P          +4.3%

Real Estate          +1.4%

Staples          +0.1%

Utilities          -1.7%

Financials          -1.9%

Industrials         -3.0%

Communication Services          -4.6%

Energy          -4.5%

Materials          -8.4%.

The one-year performance of the S&P ex-Communication is +4.3%.  Ex-IT, it’s +2.8%.  In other words, unlike Communication, IT hasn’t been totally crushed.

It’s worth noting that outperformance over the past year has come from consumer spending + globally-oriented secular growth sectors (Healthcare and IT).  Anything tied to the administration project of reshaping the US into a WWII-era industrial power has lost money.   This may be partly due to its beneficiaries being, for one reason or another, privately held.  On the other hand, there’s nothing in the S&P performance numbers to suggest belief either that the White House strategy will result in economic growth or that it will do considerable damage.

One other factor in the one-year returns:  during periods when the monetary authorities are draining excess liquidity from markets (by raising interest rates) stock market tend to be stuck in neutral–as PEs contract and offset the positive impact of higher earnings.  That’s a good part of what has been occurring in the US this year.  Once conditions have returned to normal, stocks tend to become much more responsive to earnings increases.  If today’s S&P is looking forward into 2019, it’s more-defensive-than-not posture implies a belief that next year earnings growth may be hard to come by.

December will likely give us further indications of how the  consensus about 2019 is forming.

November 1, 2018

October was a wicked month for everyone who (like me) holds no Utilities or Staples.  The capital changes returns by sector for the S&P were as follows:

Staples .         +2.1%

Utilities .         +1.9%

Real estate          -1.7%

Financials .         -4.9%

Communications services          -6.0%

Healthcare .         -6.8%

S&P 500 .         -6.9%

IT .          -8.1%

Materials          -9.5%

Industrials          -10.9%

Energy          -11.3%

Consumer discretionary .         -11.3%.

The outperformers, in this case = less cyclical sectors, are not that surprising.  The underperformers, on the other hand, are much more revealing.  My IT stocks were clobbered during October, but the sector as a whole was miles better than Consumer discretionary and Energy.  The latter two were also worse than the more highly cyclical Materials and Industrials.

Two possible reasons come to mind:  Energy and Consumer discretionary have been better performers through September; long-only investors can only sell what they own, not what they don’t.

Hopefully, the news will be better a month from now.

October 2, 2019

The S&P 500 returned 7.2% for 3Q19 on a capital changes basis (without dividends included).  That’s the lion’s share of the 9.0% return the S&P has racked up year-to-date.  The month of September, while still in the black at +0.4%, wasn’t nearly so impressive.

The returns by sector–all adjusted after the fact as if the new Communication Services sector had been in existence for all of 2019–for the S&P 500 are as follows:

for September

Communication Services            +4.3%

Healthcare          +2.8%

Energy .         +2.4%

Industrials .         +2.1%

Consumer discretionary .         +1.0%

Staples          +0.6%

S&P 500  .        +0.4%

IT .         -0.4%

Utilities .         -0.9%

Materials .         -2.3%

Financials          -2.4%

Real estate .         -3.2%.


Healthcare          +14.0%

Industrials          +9.5%

IT .         +8.5%

Communication Services .         +8.4%

Consumer discretionary           +7.8%

S&P 500 .         +7.2%

Staples          +4.9%

Financials          +3.9%

Utilities          +1.5%

Real estate .         -0.0%

Energy .         -0.1%

Materials .         -0.1%.


IT .         +19.5%

Consumer discretionary             +19.5%

Healthcare          +15.2%

S&P 500 .         +9.0%

Energy           +5.2%

Industrials          +3.3%

Utilities . . . .      -0.0%

Real estate          -1.0%

Financials          -1.2%

Communication Services          -3.3%

Materials .         -4.2%

Staples .         -5.5%.

Although leadership may be rotating, the one constant over all these timeframes is the character of three underperforming industries:  Financials, Real Estate and Materials.  For Real estate, it seems clear that the bloom is coming off the rose as interest rates are rising–meaning the cost of borrowing to get ownership is rising.  Materials is one of the most business cycle-sensitive sectors.  The threat of trade war + the sliding dollar, both products of erratic Washington policymaking, are the culprits here.  The weakness in Financials is a little more curious, since the sector is a beneficiary of rising rates.

There has been so far no seasonal selloff in stocks.  Were one to happen, driven by mutual funds’ yearend housecleaning, it would occur in the next couple of weeks.  That would set the stage for a November-December rebound.  Absent a selloff, it seems to me that stocks are pricy enough that they’re likely to continue to move sideways for a considerable time.

September 4, 2018

The calendar may not agree, but as far as the stock market is concerned, summer ended last weekend, with a fourth consecutive month of positive results (assuming that we start the stock market summer in May).

For a month that has a reputation for sleepy drifting,  August was surprisingly peppy.  It also had a sector direction   …pro secular growth, anti cyclicality.

The sector returns are as follows:

IT          +6.7%

Consumer discretionary          +5.0%

Healthcare          +4.2%

S&P 500          +3.0%

Telecom          +2.9%

Real estate          +2.2%

Financials          +1.2%

Utilities          +0.6%

Staples          +0.3%

Industrials          -0.01%

Materials          -0.7%

Energy          -3.8%.

Only three of the eleven sectors outperformed.  All are the “usual suspects” for secular growth –whose results are not strongly dependent on the current cyclical economic momentum.  They have also been the stalwarts of the bull market from its inception.  The sectors most dependent on a buoyant world economy, Materials and Energy, trailed both the S&P and the market leaders by a considerable margin.

Where to from here?

The S&P 500 has risen by +8.5% ytd on a capital changes basis, which translates into a +9.8% total return (meaning including dividends), by my back-of-the-envelope calculation of the latter.  That would be a pretty good number, in my opinion, to close the year on.  There’s a lot of extra liquidity sloshing around, though–due to the imprudent nature of the Federal tax cut (it’s being paid for by issuance of government debt that Millennials will be stuck paying back) + repatriation of many billions of dollars previously being hoarded abroad by US-based companies to avoid the IRS, and boost eps as well.  This argues for further gains.

In addition, in an odd sense running the economy too hot, as Washington is now doing, is having a beneficial effect on disadvantaged areas of the US.  Employers have now got to search much farther afield to find new workers.  To my mind, strong recent results from Walmart reinforce the point that the “left behind” are now finally joining the recovery party.

On the other hand,  fiscal stimulus is being paid for by extra government borrowing.  Abundant liquidity also encourages increasingly speculative risk-taking–whose bad consequences we are already seeing in the fixed income arena through the collapse of dollar-denominated emerging market debt.

Offsetting the stimulus positive, to a small degree so far, is Washington’s economically unorthodox fascination with tariffs.  Raising the cost of imported goods to domestic consumers and the falloff in exports that retaliatory tariffs produce will slow growth both here and abroad.  The sectors most directly affected–Industrials, Materials and Energy–are the conspicuous laggards in the S&P during August.  It’s not clear to me that there’s a solid connection between the two.  Even conceding this, if I were still working I’d definitely be underweighting Industrials and Materials and equal weighting the other major sectors (i.e., going into a defensive shell) until the situation becomes clearer.  As it turns out, I don’t hold anything in either of the first two sectors in family portfolios.  I’m continuing to trim Energy and beginning to add to Healthcare.

The real harm in “protecting” domestic industry from foreign competition is long-term.  It encourages foreign firms to develop technologically while discouraging domestic firms from doing so.  So it doesn’t solve the problem of non-competitive domestic firms–it ultimately makes it worse.  And the people who are hurt the most are workers in the protected domestic industries.  But the damage only becomes evident over a period of years.  In an algorithmic-trading world, my guess is that it will take a long time for the market to make this a theme.

One more thing (sorry this so long):  stocks usually sell off for several weeks during September-October as mutual funds do tax planning in advance of the end of their tax year on Halloween. This is typically followed by a November-December rally.   The rally happened in 2017; there was no selloff, however.  I have no idea why not.  My thought on this is my usual one:  use any selloff to sell clunkers, which typically go down the least (since usually they’ve never gone up) and buy strong potential performers that are being sold off  …and being priced more reasonably than they are now.

August 1, 2018

For the first time in a long while, I was surprised by the July sector-by-sector results for the S&P 500 when I was compiling the figures last month    …overall index performance, too.  Yes, I was travelling (Japan and Italy) during the month and maybe didn’t pay enough attention, but it seemed to me that IT was certainly down in July and the S&P 500 was at best flattish.

That’s far from correct.  The actual sector breakout is as follows:

Industrials          +7.3%

Healthcare         +6.5%

Financials          +5.2%

Staples          +3.9%

S&P 500          +3.6%

Materials          +3.0%

IT          +2.0%

Utilities          +1.8%

Consumer discretionary          +1.7%

Energy          +1.4%

Telecom          +1.0%

Real Estate          +1.0%.

So, the month was actually strongly positive;  in fact, all sectors were in the black.

On the other hand–and as you can see by scrolling down to the first half figures just below–the three big winners of the opening six months of 2018, Consumer discretionary, IT and Energy, all underperformed.  Maybe I was unduly influenced by the showing of my personal holdings, which are heavy in IT and Energy (although I’ve begun to trim the latter).

Notably, Netflix (which I own) and Facebook (which I don’t) fell by 20% from their highs–and 12% or so for the month.  [A curiosity:  HMNY, owner of Moviepass, was trading at about $0.08 a share earlier in the month, when it executed a 1 for 250 reverse split.  Despite this, it ended July trading at about $0.50–or about 2.5% of its pre-split price!  I can’t remember ever having seen something like this.]

I think rotation toward laggards perceived as being too cheap and away from long-term champions that have gotten ahead of themselves is the majors story here.  Certainly we have that with Staples and Financials vs. IT and (maybe) Energy.  But there’s also something more.  Perennial laggards like Utilities, Telecom and Real Estate (all interest-rate sensitives) continued to sag in relative terms.  This despite President Trump’s ill-advised warning to the Federal Reserve to stop raising interest rates.

Also, the initial negative economic effects of Trump’s trade/tariff strategy (if that’s the right word) are beginning to come in.   More will become evident in August.  I think they’ll continue to illustrate that the administration has little clue about what it’s doing in this area.

July 2, 2018

June was a month for, at the very least, resetting expectations.   Many IT stars of the first half suffered losses of 10%+ during the past few weeks.  As well, I think, increasing investor discomfort with erratic behavior and loony economic policies within the Trump administration has begun to spread from the currency market to stocks.

Below, I’m listing the performance of the S&P 500 by sector for three periods in 2018–the month of June, 2Q18 and year-to-date.  Let’s start with the last of these:


Consumer discretionary          +10.8%

IT          +10.2%

Energy          +5.3%

S&P 500           +1.7%

Healthcare          +1.0%

Real estate          -1.0%

Utilities          -1.5%

Materials          -4.0%

Financials          -4.9%

Industrials          -5.6%

Staples          -9.9%

Telecom          -10.8%.

The first thing that jumps out to me about the first half is how narrow the list of winning sectors is.  The second is that sectors like Materials, Industrials and Financials, which should do well in a growing economy, all lost ground.  The administration’s actions make a weird kind of sense–create a massive fiscal stimulus through corporate tax cuts (the one that should have happened in 2009) at the time it’s needed least, but counter that by starting a trade war that could easily trigger an economic slowdown.  Yes, we should have lowered have lowered the headline rate, in my opinion, but we should have recouped the lost tax revenue by closing loopholes.

Hard to believe this was planned.

Typically during my working career, politics has played virtually no role in determining stock market returns.  But I can’t help thinking that the shape of the first half –low absolute numbers + an avoidance of industrial America is a function of how erratic Washington continues to be.  My guess is that 3Q18 won’t be much different, other than that IT will have a difficult time matching its first half advances.


Energy          +12.7%

Consumer discretionary         +7.8%

IT          +6.8%

Real Estate          +5.1%

S&P 500          +5.1%

Utilities          +2.8%

Healthcare          +2.7%

Materials          +2.1%

Telecom          -2.3%

Staples          -2.3%

Financials          -3.6%

Industrials          -3.7%.

Same general pattern as for ytd:  a narrow list of winners, with secular growth = good; cyclical strength = bad.  Energy does well because of evidence that the oil supply glut is over; also, Mr. Trump initiates a boycott of Iranian output that has pushed prices maybe 15% higher than they would otherwise have been.  This burden falls disproportionately on the shoulders of Americans driving gas guzzlers.  Ultimately a plus for electric cars, although customers may be less patient with Tesla.


Staples          +4.2%

Real Estate          +3.9%

Consumer discretionary          +3.5%

Utilities          +2.5%

Telecom          +2.2%

Healthcare          +1.5%

Energy          +0.6%

S&P 500          +0.5%

Materials          +0.1%

IT          -0.4%

Financials          -2.0%

Industrials          -3.4%.

June has been what one might call a valuation adjustment month–where the market judges that stars are too pricey and the left-behind too cheap.  So previous laggards outperform while market darlings correct, This sort of consolidation is normal, and usually plays itself out in a month or two.  What’s notable, however, is that Materials, Financials and Industrials continue to be at the bottom of the performance pile.

It seems to me that what happens with trade is the key to the second half.  I’ll write about this as I form more detailed thoughts.  So far, though, Mr. Trump seems, unfortunately, to be reprising his role as Atlantic City casino magnate.

June 1, 2018

The economic ground supporting financial market is slowly beginning to shift–in a negative way for you and me as investors, I think.

Italy has elected a government that seems dedicated to reenacting the Greek financial crisis on a much larger Roman stage.  At the same time, Great Britain seems to be sailing into a “hard” Brexit by blissfully failing to deal with the economic practicalities of a post-EU membership world.  And the Trump administration is using specious “national security” reasoning to protect inefficient domestic industry from global competition–to no good economic end.  As Republican Senator Ben Sasse of Nebraska commented, alluding to disastrous tariff wars of the early twentieth century, Trump risks turning “Make America Great Again” into “Make America 1929 again.”

Let’s look at May returns.

Last month the S&P 500 did more backing and filling, with one notable exception–IT.  The returns by sector were as follows:

IT .         +7.1%

Industrials .         +2.7%

Energy .         +2.5%

S&P 500 .         +2.2%

Real estate .         +2.0%

Consumer discretionary .         +1.9%

Materials .         +1.8%

S&P 500, ex IT .         +0.5%

Healthcare .         +0.02%

Financials .         -1.1%

Utilities .         -1.7%

Staples .         -1.8%

Telecom .         -2.2%.

As this list shows, IT is the big reason the index made gains in May.  The past 12 months have followed a similar pattern.  The S&P is up by 12.2% since last June:  IT advanced by 26.4% over the same timespan.  My back-of-the-envelope calculation is that the S&P ex IT was up by about 7.5%.

As I’ve been writing over the past short while, I don’t see this pattern changing any time soon.  I think we’ve already seen the best of the Energy rally.  Staples has large exposure to the euro, which is weakening as the Italy situation develops.  The resulting rise in the dollar has stalled progress for Financials.

While Trump tariffs may bring short-term benefits to a small number of domestic industrialists, history shows protectionism tends to cause devastating long-term harm to the affected firms (look at the heavily-protected “Big Three” of Detroit over the past fifty years).  They also result in a substantial reduction in the standard of living for the country as a whole.  Maybe a few Industrials look better because of the president, but prospects for Consumer discretionary as a whole look far worse.

The bottom line:  Among the bigger sectors, IT–no matter how expensive it looks–is all that’s left in the US.  What looks better?  I don’t know–China, Mexico, France?

Of course, we don’t know in detail how Trumponomics will play out.  The only model I can think of that we have for Mr. Trump in action in a way that affected the public is the (disastrous) DLJ/Salomon-led offering of securities in Trump’s Atlantic City casinos.

It may be that effective opposition will emerge in Congress, however, as voters work out how destructive the Trump trade gameplan actually is.

May 1, 2018

school’s out for summer (for me, anyway)  so I should have more time to write about the stock market over the next couple of months

The S&P 500 continues to “back and fill,” as they say.

This is apparently a sailing metaphor, meaning to zigzag.  I’ve always thought of it as a construction metaphor, describing how a bulldozer levels out chopped up ground in preparation for further building work.

In any event, the idea is that after a leap upward the market has to spend time trading in the intermediate ground between the old highs and the new ones.  In the present case, we’e also facing the potential headwind of higher interest rates–as well as preliminary signs that the domestic economy is beginning to shift into a slightly lower gear.

Overall, the S&P went sideways during April, gaining a better-than-a-loss-but-still-small +0.27%.  The sector breakout of that return is as follows:

Energy          +9.3%

Consumer discretionary          +2.3%

Utilities          +2.1%

Healthcare          +1.1%

S&P 500          +0.3%

Materials          +0.1%

IT          +0.0%

Financials          -0.5%

Real Estate          -0.8%

Telecom          -2.3%

Industrials          -2.9%

Staples          -4.5%.

What stands out to me?

–Energy, which is suddenly in favor.  Part of this is a rising crude oil price.  Valuation also plays a large part, I think, since Energy followed a wretched 2017 with pretty awful relative performance in 1Q18.  I also see an à défaut de mieux aspect to Energy’s gains, since I don’t find a ton of obviously overlooked/attractive opportunities in other sectors.  Arguably, OPEC’s production-limiting agreement has held together better than anyone might have expected.  But I worry that part of the sector’s current strength comes from naive newsfeed-reading algorithms, which are mistaking seasonal price rises for something more enduring.  Time will tell, but I’ve already begun to trim the shale oil positions (HES and WPX) I built up in the second half of last year.

–Staples.  Over the past decade or two,  Staples has been a sleepy sector whose main portfolio-construction characteristic is its large foreign exposure.  So it has been a way of betting on foreign currency strength/US$ weakness.  That’s still the case.  But this characteristic is being overshadowed by Millennials’ rejection of the sector’s mainstays as sugar/salt-filled junk.  I don’t see the situation changing soon.

–ex-Energy and Staples, more business cycle sensitive sectors are the weakest.  I think this makes sense.  My guess is that the S&P continues in the same vein through the summer.  In fact, although relative sector performance is much more important for portfolio management than absolute performance, my hunch is that the S&P continues to go sideways until we’re breaking out rakes to deal with backyard leaves.

April 2, 2018

The first six weeks of 2018 were great, but it’s been mostly downhill from there.  The main reason for this is simple, in my opinion.  During that glorious opening stanza, the S&P 500 made all the gains one might reasonably expect of the market for the entire year.  So there was no way to go but down.  Put another way, prices were high enough that there was no room for even the slightest disappointment.  A third formulation:  prices seldom tread water–they either go up or down.  So if up is out of the equation…

March played out as follows:

Utilities .         +3.4%

Real estate .         +3.3%

Energy .         +1.6%

Telecom .         -1.1%

Staples .         -1.3%

Consumer discretionary .         -2.5%

S&P 500 .         -2.7%

Industrials .         -2.8%

Healthcare .         -3.2%

IT .         -4.0%

Materials .         -4.5%

Financials .         -4.5%.

If we take this one month by itself–that is, don’t consider what relative performance had been in the months before–the pattern of trading is very clear.  Defensive sectors, meaning ones with earnings that are relatively steady, no matter what the economic circumstances + high dividend yields–did best.  The most sensitive to the ups and downs of GDP, on the other hand, underperformed(healthcare being the sole exception).  To some degree, however, this may be a case where stocks that never went up had much more limited scope to go down.  And personally, I’m in no rush to stock up on Utilities, Telecom or Staples.

Looking at the first quarter of 2018 gives a quite different picture:

IT .         +3.2%

Consumer discretionary .         +2.8%

S&P 500 .         -1.2%

Financials .         -1.4%

Healthcare .         -1.6%

Industrials .         -2.0%

Utilities .         -4.2%

Real estate .         -5.8%

Materials .         -6.0%

Energy .         -6.6%

Staples .         -7.8%

Telecom .         -8.7%.

First of all, the March winners are still the most serious losers for the quarter as a whole.  Also, there are only two outperforming, in-positive-territory sectors.  This is unusual.  One is IT, which has exceptionally good future prospects and whose main question mark is valuation.  The other is Consumer discretionary, a sector undergoing structural change, driven by online shopping, but which tends to do well in a so-so economy.

Is the “big picture” story of 1Q18 that a booming economy will result in interest rates rising more quickly than trading bots have anticipated?  I think that’s the dominant theme of March trading.

I think there’s also a bit of worry about President Trump’s actions/pronouncements on trade.  He seems to have rolled back the clock by a century to embrace ideas, now discredited, which made the Great Depression longer and deeper than it needed to have been.  Ironically, if put into practice his theories will likely be most harmful to the people who voted for him.  The upshot of all this is that Washington sees to be more dysfunctional–and scarier–on both sides of the aisle than ever.  But I think stock prices reflect the belief that Washington will be unable to get out of its own way and will not do much in either the plus or minus column.  Personally, I don’t expect any surprises on the upside.  So I expect Mr. Trump will take away at least some of the potential upside for stocks fro here on, but not to the degree that his administration has destroyed national wealth over the past year through decline in the dollar.

My bottom line:  stocks meander for a while yet.

March 3, 2018

By the standards of the past year or so, February was an ugly month.  The S&P 500 actually went down–by 3.9%.  That would be an unusually large dip, except that stocks have been doing nothing but going up, month after month, for the past year or so.  In fact, the February decline doesn’t even erase the gains chalked up in January.

By sector, the S&P looked like this:

IT .         -0.1%

Financials .         -3.0%

Consumer discretionary .         -3.6%

S&P 500 .         -3.9%

Industrials .         -4.3%

Utilities           -4.4%

Healthcare .         -4.6%

Materials .         -5.5%

Real estate .         -7.0%

Telecom .         -7.1%

Staples .         -7.8%

Energy .         -11.3%.

One thing to note–even though it’s not that unusual–is that no sector delivered positive returns.  IT came the closest, losing only 0.1%.  Financials and Consumer discretionary joined it as the only sectors to outperform.

The issue bothering Wall Street last month was that domestic interest rates are set to rise more quickly–and somewhat more sharply–than the consensus had expected.  So the outperformance of Financials (which benefits from higher rates) is easy to understand.  The performance of IT, a sector whose huge previous outperformance should have arguably made it a prime target for sellers, is really impressive.  Consumer discretionary is more of a headscratcher.  Strong performance here may mark the start of bottom-fishing.

On the other side of the ledger, Utilities, Real Estate and Telecom, are quasi-bond sectors.  So their weak showing is also understandable.  What’s more notable is that the February losers are, by and large, the underperformers from full-year 2017.

This implies the selloff has had little to do with worries that the profit picture is changing for the market as a whole.  Instead, it’s been about the relative attractiveness of stocks as a class versus cash/bonds.  Of course, this selloff also means we’re one step closer to factoring into stock prices the fact that rates are going up.

At some point, fixed income will provide serious competition for stocks.  This is an issue worth careful consideration.  If 10-year Treasuries were yielding, say, 4%, would I take some of my money away from stocks and buy bonds?  Personally, my answer would be Yes.  Since I’m not especially partial to bonds, this says to me that when we get to something like 3.5%, it’s possible we’ll see significant reallocation away from stocks.

How will that play out?  I don’t know.  If February price action gives a preview (it may not), then “good” sectors will go sideways and “bad” ones will be sold off aggressively.

Another point:  Energy.  January – March is the weakest part of the year for demand for petroleum products.  It’s worrying that Energy stocks sold off so aggressively in February.  But it’s equally odd, in my view, that they went up in January, which is usually the worst month of the year for oil.  Yes, this may simply be a reflection of the course of spot oil prices …but it’s still odd.

A final note:  it’s worth looking at how the names in your portfolio are performing vs their sector averages.  My guess is that strong February performance will be an indicator of strong future performance, as well, and vice versa.   That’s not always the case.

February 5, 2018

There has been a noticeable chill in the financial markets over the past few days.  January 2018, however, was another stellar month for the S&P 500, which rose by 5.6%–even though giving up about a percentage point in gains during the last day and a half of trading.

By sector, returns for January were as follows:

Consumer discretionary          +9.2%

IT          +7.6%

Healthcare          +6.6%

Financials          +6.4%

S&P 500          +5.6%

Industrials          +5.3%

Materials          +4.1%

Energy          +3.8%

Staples          +1.4%

Telecom          -0.6%

Real Estate          -1.9%

Utilities          -3.1%.

This relative sector performance is a familiar one.  Two secular growth sectors (IT and Healthcare), one that benefits from rising interest rates  Financials)and one (Consumer discretionary) that is being boosted by a surprisingly strong holiday shopping season, one that has–equally surprisingly–disproportionately positively benefited bricks-and-mortar retail.

I’ll write in some depth in a couple of days about what I think is going on now in the stock market.  For this post, though:

–corrections last more than a few days

–this is mostly about rising interest rates, I think

–notably, sectors that benefit from torrid growth–Energy, Materials, Industrials–continue to be laggards, despite Washington rhetoric

–the dollar has been conspicuously weak since January, something that I think is being caused, intentionally or not, by Washington, and which I think is likely to continue.

January 3, 2018

Happy New Year!!!

2017 was certainly a banner year for the stock market.  It’s hard to believe that 2018 will be as strong.  On the other hand, there are no signs that I can see of impending economic weakness–which would imply an another up year in 2018.  The one red light that I do see flashing is for IT, which as a sector now accounts for about a quarter of total S&P 500 market capitalization.  In my experience, that’s about as large as I’ve seen a single sector get (other than during the internet mania of 1999-2000) before a period of relative underperformance to restore relative value.  Personally, I’ve trimmed my tech holdings a bit (selling ADBE and buying HES) but am more or less content for now to watch what happens.

Sector performance breakout for full-year 2017:

IT .         +36.9%

Materials .         +21.4%

Consumer discretionary .         +21.2%

Financials .         +20.0%

Healthcare .         +20.0%

S&P 500 .         +19.4%

Industrials .         +18.5%

Staples .         +10.5%

Utilities .         +8.3%

Real Estate .         +7.2%

Energy .         -3.8%

Telecom .         -6.0%.

My back-of-the-envelope calculation is that the S&P ex IT rose by a bit more than 13% last year, suggesting there is better short-term investment value today outside tech than inside.

This pattern was substantially reversed in December, however, which played out as follows:

Telecom .         +5.8%

Energy .         +4.7%

Consumer discretionary .         +2.3%

Staples .         +2.0%

Financials .         +1.8%

Industrials .         +1.8%

Materials .         +1.8%

S&P 500 .         +1.0%

IT .         -0.03%

Healthcare .         -0.8%

Real estate .         -1.0%

Utilities .         -6.4%.

I interpret this result as a combination of yearend selling of high-flying tech names plus rotation away from tech into Energy and Consumer.  I suspect that aggressive tech selling will decline in importance as January unfolds, but the rotation into Energy and Consumer–discretionary and staples–will continue.  The situation will become clearer over the coming couple of weeks, I think.

December 4, 2017

Better late than never.

Yet another monthly gain for the S&P 500.

For the first time in a long while, however, the IT sector underperformed  …badly.  I think this is mostly a question of relative valuation.  After all, over the past year, IT has gained 39.0%.  This compares with an advance of 20.4% for the S&P 500 as a whole–implying that the S&P ex IT rose by a (still respectable, if left-in-the-dust) 13.3%.  That’s a huge difference over a short period of time.  Bonds were basically flat over the same period, by the way.

Whenever there’s significant outperformance like this for a portion of the market, there’s always a period of catch-up for the lagging sectors.   At the very least, market participants with a short time horizon–who may have been long the leaders and shorting the laggards up until now–reverse their positions on the (correct) idea that the leaders have gone too far too fast and the laggards have been beaten down too much.

In the current case, there’s also recent data suggesting that overall US economic gains are finally beginning to accelerate–a factor that makes the laggards appear that much more undervalued.

It’s hard to say how long this incipient countertrend rally will last.  Usually one runs anywhere from a couple of weeks to a month or two.  This is, by itself, no reason for long-term investors to make a significant alteration in portfolio composition.  However, it is a chance to take some profits and maybe make a trading gain on bottom fishing among the lagging sectors.  And if your portfolio is, say, 70% technology (not a structure I’d recommend for anyone), it is a signal to assume a less aggressive posture.

November’s sectoral breakout:

Telecom          +5.9%

Staples          +5.4%

Consumer discretionary         +4.9%

Industrials          +3.5%

Financials           +3.3%

S&P 500           +2.8%

Healthcare            +2.7%

Real Estate           +2.7%

Utilities           +2.2%

Energy           +1.2%

Materials           +0.7%

IT           +0.7%.

PS.  The Telecom sector has shrunk to a mere 1.3% of the total market cap of the S&P 500.  Standard & Poors has recently announced it will discontinue the Telecom sector late next year, replacing it with a new communications sector built from the old Telecom + broadcast, cable and entertainment stocks now part of Consumer discretionary.

November 1, 2017

Too much candy left over (is there such a thing?), but otherwise a good Halloween.

The S&P 500 sailed through September and October without a sign of what I regard as normal end of year selling by mutual funds.  Hard to know why, other than perhaps the industry is no longer the bellwether it was a decade or two ago.  Just a curiosity to keep in the back of our minds.

The S&P 500 gained 2.2% on a capital changes basis during October, bringing its year-to-date total, not counting dividends, to a tad above 15%.  Not what many (including me)  would have expected last December.

The major market story line continues to be IT, a sector which is up by 35.7% through Halloween.  Yes, the rest of the market has advanced, but its return is 10.5%.  That latter figure would be more than satisfactory as a return in most years, but not in 2017 so far.  And, yes, it’s possible to be beating the market without holding any tech (or with trailing edge tech like INTC, which is up by about a quarter so far this year).  But that would require a virtuoso performance, whose elegance would likely go unnoticed by  clients (on the other hand, you wouldn’t be fired, probably).

Sector returns for the month:

IT .         +7.7%

Utilities .         +3.9%

Materials .         +3.8%

Financials .         +2.8%

S&P 500 .         +2.2%

Consumer discretionary .         +2.0%

Real estate .         +0.7%

Industrials .         +0.2%

Energy .         -0.7%

Healthcare .         -0.8%

Staples .         -1.6%

Telecom .         -8.7%.

If you flip down this page to results for prior months–especially to the year-to-September column–you’ll see that the consistent winners have been IT and Materials.

At some point, there’ll be a reckoning.  Its mildest possible form will be a correction in IT and the emergence as stars of a sector or two now in the losers pile.  My personal guess is Energy.  To the degree that the current market configuration is a result of continuing dysfunction in Washington, however, I find it hard to argue for dipping more than a toe into the portfolio revamp water.

October 12, 2017

Through the end of the third quarter, the S&P 500 has gained 12.5% on a capital changes basis (meaning without counting dividends, which are running at about a 2% annual rate).  Results for the month of September are +1.9%; for the third quarter, +4.0%.

The sector breakout of results for the three periods are as follows:


Energy          +9.8%

Financials          +5.1%

IT          +4.5%

Industrials          +3.8%

Telecom          +3.5%

Materials          +3.8%

S&P 500          +1.9%

Healthcare          +0.9%

Consumer discretionary          +0.8%

Staples          -1.1%

Real Estate          -1.9%

Utilities          -3.0%.


IT .         +11.6%

Energy .         +6.0%

Materials .         +5.6%

Telecom .         +5.4%

Financials .         +4.7%

S&P 500 .         +5.0%

Industrials .         +3.7%

Healthcare .         +3.2%

Utilities .         +2.0%

Consumer discretionary .         +0.5%

Real Estate .         +0.1%

Staples .         -2.0%

year through September

IT .         +24.4%

Healthcare .         +18.8%

Materials .         +14.1%

S&P 500 .         +12.5%

Industrials .         +12.3%

Financials .         +11.0%

Consumer discretionary .         +10.8%

Utilities .         +9.0%

Real estate .         +4.7%

Staples .         +4.4%

Telecom .         -8.1%

Energy .         -8.6%.

I think the one-month and year-to-date results are probably more important to analyze than 3Q.  Several things stand out to me:

–despite being the largest sector in the S&P, comprising about a quarter of the weighting of the index, and containing a large number of the biggest companies (which are typically harder to move up than smaller ones), IT has continued to be the dominant sector in terms of performance throughout the year.  My back-of-the-envelope calculation says IT accounts for almost half of the 12.5 percentage points the index has gained through nine months.  I have no good answer (and I hold a lot of tech myself), but the most important question for making relative outperformance over the coming year is likely to be how long IT can continue this kind of performance.

That’s because this kind of dominance is unusual.  Rotation among sectors based on relative valuation and changes in earnings prospects is much more common.  The resurgence of the Energy sector is a case in point.  Yes, there are always special considerations, but the fact that Energy had been down by close to 20% for the year through August in a market that was up by around 10% suggested it was due for at least a technical bounce.

–Other bottom dwellers have been as notably consistent in their own way as IT has been in its.  Utilities, Real Estate, Telecom, Consumer discretionary and Staples have all consistently underperformed.  All but Real Estate face secular challenges.  Real Estate is likely to be one of the chief losers from higher interest rates, as/when they come.

–What could break IT’s current stranglehold on success?    My guess is probably not the bottom dwellers.  Instead, an end to dysfunction in Washington–Congress and White House–would at at the top of my list.  That would likely lead to meaningful tax reform or infrastructure spending, new themes other than the secular growth of IT and the (temporary, I think) resurgence of Energy for investors to play.

–A second approach, which sector analysis won’t help much with, is to dig down into Consumer discretionary and Staples to find individual subsectors and/or companies that are bucking their overall sector trends.  This means having appeal to Millennials/healthy, environmentally-friendly products/managements open to change (not just, a la Washington, defending their own perks).

August 1, 2017

…another month of Washington craziness.  …another month of gains for the S&P 500.

This result reinforces Wall Street’s traditionally deep suspicion of “investing” whose main focus is on politics (although I personally believe that in today’s world Washington does matter); earnings generation and earnings/cash flow growth are typically all that is important.

The S&P 500 rose by 1.9% on a capital changes (i.e., before counting dividends) basis in July, raising the year-to-date gain to 9.5%.  No wonder the index feels like it’s temporarily running out of steam.

The sector breakout for July is as follows:

Telecom          +5.1%

IT          +4.3%

Utilities          +2.4%

Energy          +2.4%

S&P 500          +1.9%

Financials          +1.8%

Consumer discretionary          +1.8%

Materials          +1.4%

Real estate          +1.1%

Healthcare          +0.7%

Staples          +0.4%

Industrials          +0.01%.

Maybe it’s the aftereffects of a week without the internet, but I’m straining to make sense out of July price action.  If any readers have insights they’re willing to share, please feel free to comment.

The only thing that really jumps out to me is the effect of the IT sector on the overall picture.  Given its large size, IT contributed about half the return on the index last month.  The S&P ex IT would have been up by about 1%.

Looking at the month that way would also suggest that defensives like Telecom and Utilities are the real standouts.  Industrials is the only sector performing significantly below the index.

Perhaps August will bring more clarity.

July 3, 2017

May’s post appears to have disappeared into the ether.  How did that happen?

…on to June, 2Q and 1H2017.

June’s S&P 500 gain of 0.5% capped a successful 2Q2017 (+2.7%) and 1H2017 (+8.2%)–all on a capital changes basis.  The sector breakout of those returns is quite different in June, however, from the previous five months.

June played out like this:

Financials          +6.3%

Healthcare          +4.5%

Materials          +1.6%

Real estate          +1.4%

Industrials          +1.3%

S&P 500          +0.5%

Energy          -0.3%

Consumer discretionary          -1.3%

Staples          -2.5%

IT          -2.8%

Utilities          -2.9%

Telecom          -3.0%.

This is an unusual sector configuration, in that there’s very wide dispersion around the index on both positive and negative sides.  Financials and Healthcare are big winners;  Staples, IT, Utilities and Telecom are very substantial losers.  In addition, there’s a dramatic reversal in the relative performance of IT, Financials and Energy–all principally based, I think, on relative valuation.

Contrast that with the sector performance for the overall second quarter and year to date:


Healthcare          +6.7%

Industrials          +4.2%

Financials          +3.8%

IT           +3.7%

S&P 500          +2.7%

Materials          +2.6%

Consumer discretionary          +2.0%

Real Estate          +1.8%

Staples          +0.9%

Energy          -7.0%

Telecom          -8.1%.


IT          +16.4%

Healthcare          +15.0%

Consumer discretionary          +10.2%

Industrials          +8.3%

S&P 500          +8.2%

Materials          +8.1%

Utilities          +6.9%

Staples          +6.6%

Financials          +6.0%

Real estate          +4.6%

Telecom          -12.8%

Energy          -13.8%.

where to from here?

World economies are strong–and strengthening–and there’s still a lot of excess money sloshing around looking for a home (how else could APRN get an IPO off and how else can WFM be trading above the AMZN offer price?).  So the stock market will likely trend sideways to up.

Although I’m a big fan of IT, I think it’s too soon to think the market rotation away from this sector has run its course.  I think this is more an issue of time than of price, although I also believe that computers are behind what I view as a countertrend movement–which would imply, for me, that there’s no experience to fall back on in predicting exactly what will happen from here.

By this time, the post-election Trump rally is only a distant memory.  What has come into greater relief on the Washington scene is the dysfunction being caused by fractures within the two major parties.  The ineptness of the new administration hasn’t helped, either.  But although I see no reason for the Trump sectors to do well today, I also think it would be a mistake to write them off completely, given how active citizen discontent with Washington has become.

My own portfolio is overweight IT, Financials and Energy (in the form of US shale oil companies).  I see no reason to change things for now.  At some point, I anticipate at least reducing the Energy I hold.  But I’m in no rush.

May 1, 2017

Another month, another gain.

The S&P 500 rose by +0.9% in April, bringing the year-to-date total advance to +6.5%.  Adding another +0.5% for dividends brings the total return to +7.0%.

On a sector basis, the returns for April break out as follows:

IT           +2.4%

Consumer discretionary          +2.4%

Industrials          +1.7%

Healthcare          +1.5%

Materials          +1.4%

S&P 500     +0.9%

Staples          +0.9%

Utilities          +0.7%

Real estate          -0.0%

Financials          -1.0%

Energy          -2.9%

Telecom          -4.4%.

My first observation is that the big deviations from the index are on the downside–Energy and Telecom.  In both cases, I think, the reasons are sector-specific (weakish oil prices and more intense competition among wireless companies), rather than macroeconomic.

The remaining sector moves seem to me to be a continuing recalibration of the Trump trade–the idea that a brash economy-savvy outsider, free of the chains of special interests and a member of the same party that controls Congress, would quickly be able to get commonsense legislation that would spur economic growth enacted.  Except for the “quickly” part, that may still happen.  It has become clear, though, that the Republican party itself is dysfunctional and that Mr. Trump faces a much steeper learning curve on economic matters than even his critics had imagined.

Nevertheless, the S&P continues to drift higher.  This is partly due to good economic news coming from Europe and China, as well as from the domestic economy.  It is also partly due to a refocusing of market attention to secular growth areas like IT and Healthcare.  Underlying, and central to, this relative optimism is still, I think, the belief that the economic promise of a Trump administration is merely being deferred, and not just fake news.

April 3, 2017

We’ve made it through the month of March, and the first quarter of 2017, without getting dented up too badly.  In fact, keeping pace with the S&P 500 has meant no gain (but no loss) in March and a whopping +5.53%, in addition to about +0.5% in dividends, year to date.

What’s very noticeable about the first quarter, however, is that the “Trump trade” has been a distinct negative.   Consider the sector composition of returns on the S&P 500:


IT          +2.5%

Consumer discretionary          +1.9%

Materials          +0.2%

S&P 500          -0.0%

Utilities          -0.5%

Staples          -0.7%

Industrials          -0.8%

Energy          -1.1%

Telecom          -1.2%

Real Estate          -1.5%

Financials          -2.9%.

A quick summary:  the two significant winners are industries where the most important factor is structural change, not where we are in the business cycle or who will benefit from a surge in the economy.  Of the big Trump trade beneficiaries from late last year, only Materials eked out a relative gain.  Industrials, Energy and Financials have reversed their late 2016 form completely.

1Q 2017

IT          +12.2%

Consumer discretionary          +11.1%

Healthcare          +7.9%

Staples          +5.6%

S&P 500          +5.5%

Materials          +5.3%

Industrials          +4.0%

Real Estate          +2.7%

Financials          +2.1%

Telecom          -5.1%

Energy          -7.3%.

Same pattern as in March.

Where to from here?

Hard to say, but my best guess is sideways.  I also think that IT and Consumer discretionary will continue to outperform–unless/until President Trump either demonstrates that he is willing and able to effect the favorable structural changes he has promised or shows himself to be as truly inept as analysis of his real estate career and his performance in the Oval Office to date make him seem.  In the latter case, we’re probably waiting for the next Congressional election as the nation’s best hope for gridlock-breaking and stock-lifting developments.

March 1, 2017

+3.4%, +9.5%, +1.9%, +3.7%.  Those are the monthly returns for the S&P 500 from November onward.

The sector breakout of the returns for February is distinctly different from the months that preceded it, however.  They are as follows:

Healthcare          +6.2%

Financials          +5.0%

Staples          +4.9%

IT          +4.9%

Utilities          +4.7%

Real estate          +4.4%

S&P 500          +3.7%

Industrials          +3.4%

Consumer discretionary          +1.8%

Materials          +0.5%

Telecom          -0.4%

Energy          -2.7%.

A first glance, but one also close to the mark, says that the Trump rally–benefiting Materials, Energy and Industrials–has run its course for now.  The market appears to have decided to wait for concrete proposals on tax reform and infrastructure

Nevertheless, there’s more than that, and than the concomitant countertrend rally in Healthcare, Real Estate, and Utilities, at play here.  It is becoming clearer that the economies of the US and Europe are in far better health than the consensus believed even a few months ago.  Hence the continuing strength of the S&P 500 as a whole, despite Trump sectors temporarily running out of steam,as well as the oomph in Financials, IT and Staples in particular.

Where to from here?

I think that there’s money to be made from the playing out of long-term trends, like the continuing move of commerce from physical stores to online and the passing of the economic baton from Baby Boomers to Millennials.

At the same time, the political landscape is beginning to change in ways that I think are significant, unusual and sometimes worrying–and whose end result I find difficult to predict.   I’ve often thought to myself, with no concrete evidence, that Washington probably subtracts 1% from GDP in the US each year through its dysfunction.  Conceptually, I’m thinking that that forces now in their infancy could change that to either -2% or, in the best case, even a slight plus.  For now, though, I think the S&P will continue to rise on hopes of tax reform and infrastructure spending.  But we have to keep it in the back of our minds that a lot depends on the bull we’ve let loose in the china shop.

February 1, 2017

One month down, eleven to go.  …and so far, so good.

Through January 30th (I compiled this month’s numbers yesterday evening, before S&P had updated results for January 31st trading), the S&P 500 rose by 1.9%.

The breakout of returns by sector is as follows:

Materials          +5.6%

IT          +5.0%

Consumer discretionary          +4.5%

Industrials          +2.3%

S&P 500          +1.9%

Staples          +1.1%

Financials          +0.8%

Healthcare          +0.7%

Utilities          -0.4%

Real Estate          -0.9%

Energy          -3.5%

Telecom          -3.5%.

What to make out of this list?  Certainly, it’s dangerous to read too much into January results, since taxable investors often take profits among their winners from the prior year.

I think that’s part of what happened to Energy and Telecom stocks (the rest is that January is the slowest month of the year for oil prices/demand, and weak earnings from wireless providers).

Conversely, Consumer discretionary had a forgettable 2016 and, arguably, some bounceback was in order.

To me, the real information is in the continuing strong showing by Materials and Industrials–and continuing relative weakness in Real Estate and Healthcare.

What’s driving this is the stock market’s belief, justified, in my view, that economic growth in 2017 will be better than in 2016.  In the US, this outcome hinges in considerable part on the idea that the Trump administration will begin large-scale infrastructure spending by the Federal government.  Hence the interest in cyclicals like Materials and Industrials, plus the relative indifference to all-weather sectors like Healthcare and Real Estate.

Personally, I’m not so worried about the bigoted social agenda Mr. Trump seems to espouse.  Ongoing protests of his Muslim ban tell me that the country will not allow him to express these attitudes in his official actions.  My future-course-of-the-stock-market question is whether Mr. Trump actually has  the common sense, managerial skills and business acumen he needs as President, or whether all that is simply the back story for the reality show character he played and he’s merely the dark version of Jesse Ventura that his first week in office conjures up.

I don’t think there’s any reason to become defensive right now.  But we should be at least considering how to protect our portfolios if Congress abets him in implementing some of the loony trade ideas espoused during his campaign.

January 3, 2017   

Happy New Year!!!

Last year started off with a panicky selloff in the S&P 500 during January – February.  The index worked its way back into the plus column by mid-year, where it stayed until the improbable victory of Donald Trump in the presidential election.  The selection of the person one reporter described as an “empty vodka bottle thrown through the window of the establishment” sparked a sharp rally in stocks and the US$, and a significant weakening in bonds, that continued through year-end.

For the year as a whole, the returns by sector for the S&P 500 on a capital changes basis (meaning not including dividends) are as follows:

Energy          +23.7%

Financials          +20.1%

Telecom          +17.8%

Industrials        +16.1%

Materials          +14.1%

Utilities         +12.2%

IT          +12.0%

S&P 500          +9.5%

Consumer discretionary          +4.3%

Staples          +2.6%

Real estate (only a separate sector since September)          +0.0%

Healthcare          -4.4%.

As anyone who scrolls down to the entry for January of last year can see, this result is basically 2015 turned upside down.  During 2015, the S&P was pretty much flat, with 2016’s gaining sectors showing very sharp declines and last year’s losers in the plus column.

So to some degree 2016 was a case of what goes around comes around.  One can argue that deeply underperforming sectors may have bounced back simply on a valuation basis.  But it’s more than that, I think.   The market believes, more or less correctly, in my view, that the Trump victory signals the end of Washington’s policy stalemate.

The two most important questions for this year:

–to what degree will last year’s losers bounce back? and

–how much like the stranger who rides into the Old West town in the movies and cleans out a nest of outlaws who control it will Mr. Trump be?

This is mostly a sector allocation question, I think.

My guess is that Energy and Financials will do well, and Consumer discretionary will continue to struggle with structural changes in that sector.  I’m willing to believe that Congress will function and that there may be corporate tax reform and a big infrastructure spending program.

One wild card:   the only thing we really know about Donald Trump as a businessman is his performance running the publicly traded casino company, Trump Hotels and Casino Resorts (ticker: DJT).  In an industry that’s like a license to print money, he went bankrupt.  Investors lost 90%+ of the $140 million they entrusted to him, during a period when the S&P was gaining 150%.   According to CNN, DJT paid Mr. Trump, directly and indirectly, $39 million for doing this.  A New York Times account of the Trump time in Atlantic City presents a considerably more sordid story of DJT.

December 1, 2016

November action in the S&P 500 was dominated by Donald Trump’s surprise victory in the US presidential election.

The stock market quickly concluded that:

–with Republicans in control of both houses of Congress as well as the White House, public works spending programs blocked by the GOP for close to a decade will finally go forward.  Materials and industrials should benefit.

–the arrival of fiscal stimulus, even though belated–and at a time of full employment–will allow the Fed to raise interest rates more quickly than anticipated.  Income stocks should be hurt.  Banks benefit.

Yesterday OPEC appears to have reached an agreement to set a cap on the cartel’s aggregate production.  That sent Energy stocks on a 5% upward price spike for the day.  Enjoy this while we can.  I think there’s virtually zero chance that country by country quotas will be adhered to.

The S&P 500 results by sector, strongly influenced by these forces, played out as follows:

Financials          +13.7%

Industrials          +8.5%

Energy          +7.9%

Materials          +6.6%

Consumer discretionary          +4.5%

Telecom          +3.6%

S&P 500          +3.4%

Healthcare          +1.7%

IT          -0.6%

Real Estate          -3.3%

Staples          -4.5%

Utilities          -6.0%.

We might quibble over whether Staples sank because the sector has an income orientation or because it has large exposure to foreign currencies, which have generally declined during November on the idea that interest rate differentials between the US and the rest of the world will continue to widen in favor of the former.

My guess is that what we’ve seen in November is the new primary trend for the S&P.  At some point, there will be a counter-trend rally.  Who knows when that will emerge?  My instinct is that it would be better to continue to play the primary trend rather than looking for a valuation-based reversal.  Two reasons:  I don’t want to get into the game of trading every twist in the road; and my guess is than any reversal will be shallow and short.  If so, only the most nimble will avoid being burned if they try.

N0vember 1, 2016

The S&P 500 lost 1.9% during October.

To the degree that one can find evidence of a seasonal selloff driven by mutual funds fine-tuning their yearly profit payout to shareholders, a 3% intramonth drop in October and a similar decline in September are the best we can do.  More of a whimper than a bang.

The sector pattern of S&P results for October is interesting, and informative, however.  The (now) 11 sectors played out as follows:

Financials          +2.2%

Utilities          +0.8%

IT         -0.1%

Staples          -1.0%

S&P 500          -1.9%

Industrials          -2.1%

Materials          -2.2%

Consumer discretionary          -2.4%

Energy          -3.0%

Real estate          -5.6%

Healthcare          -6.6%

Telecom          -7.5%.

Where to start?

Ok, Financials, which occupies the #1 spot in the performance parade, gaining +4.1 percentage points vs. the market during the month.  Compare that with Real estate, until the middle of last month a component of Financials (on the rationale that both banks and real estate companies are interest rate sensitives), which lost -3.7 percentage points to the index.

Why the difference?

I think it’s that the market is finally acting on the idea that interest rates are going to rise.  Banks arguably benefit from a rising rate environment because they’re typically able to raise interest rates on loans faster than their cost of funds increases, so margins will expand.  Real estate, on the other hand, is looked at by professional investors more as a funny kind of bond than as an operating enterprise–and we know that higher rates means lower bond prices.

What’s interesting is not that these interest rate effects exist.  It’s that the market is beginning to act on their materializing in the near future.

Staples is another outperformer, despite its large exposure to the euro.

IT and Utilities (why the latter I have no idea) are also noteworthy because, unlike Financials and Staples, both were outperformers last month.

I get IT, I think.  It’s because IT is the new Industrials.  It’s also where the software and social media stocks hang out.  At a time when traditional retail is in turmoil, IT is a relatively low-risk way to bet on an expanding economy/rising stock market.

Finally, there seems to me to be no worry in the October S&P performance about the presidential election.  To my mind, this suggests the possibility of a sharp selloff if Donald Trump were to end up winning the presidential race.

October 4, 2016

The S&P 500 was virtually unchanged in September, despite that month’s well-earned reputation for seasonal price weakness.  The index lost 0.1%, the same result as in August.  The sector breakout, however, was different, not only because September was the first month of the separation as a separate sector of Real Estate (3.1% of the overall S&P market cap.) from its former home in Financials.  The month’s results are as follows:

Energy          +3.0%

IT          +2.4%

Utilities          +0.1%

S&P 500          +0.1%

Industrials          -.03%

Consumer discretionary          -0.4%

Healthcare          -0.7%

Telecom          -1.0%

Materials          -1.5%

Staples          -1.8%

Real Estate          -1.8%

Financials (ex Real Estate)           -2.9%.

Year to date, the S&P 500 has advanced by +6.1%, breaking out by sector as follows:

Energy          +16.0%

Telecom          +13.8%

Utilities          +13.1%

IT          +11.1%

Materials          +9.6%

Industrials          +8.9%

S&P 500          +6.1%

Real Estate          +5.6%

Staples         +5.4%

Consumer discretionary          +2.5%

Healthcare          +0.1%

Financials (ex Real Estate)          -0.3%.

For both periods, the constants are Energy and IT on the outperforming side and Healthcare, Staples, Consumer discretionary and Financials on the underperforming.  To some degree the laggard status of Financials is caused by the separation out of better-performing Real Estate, but the main cause is the lack of anticipated upward movement in interest rates.

More importantly, the pattern in both cases is one of more highly cyclical outdoing less highly cyclical, meaning the stock market continues to anticipate more rapid economic growth in the world in the months ahead, not slowdown.

As I’ve written elsewhere, I’m a bit perplexed about the lack of mutual fund/ETF end-of-year selling during September.  Funds have clearly used up their tax loss carryforwards generated during the massive redemptions of 2008-09, and the industry has never been good at advance planning of the size of distributions is must make to shareholders based on their October fiscal year results.  That effort usually results in substantial selling, starting some time in September and carrying over in to October.  I have no explanation for its absence last month.

One could reasonably argue that the lack of a September swoon means that the typical November – December rally will be more tepid than usual, since it would be from a higher base.  On the other hand, recent economic indicators are hinting at an acceleration in the US economy.  That would imply further strength in highly cyclicals, where, if my personal portfolio is any indication, investors are underrepresented.

The presidential election?   ..normally, I think that politics has no real bearing on the stock market, and that, therefore, ruminating about it is a waste of an investor’s time.  This November is different, though.  Donald Trump is a loose cannon who has the potential to do substantial damage to the US economy if elected president.  His picture of the global economy of the 21st century and how our country functions in it is way out of date and deeply incorrect.  Also, his social views are toxic enough that he would doubtless find it hard to recruit competent people to fill a cabinet.  More about this later in the week.

I don’t see any sign of worry about this in stock prices.  My guess is that a Hillary victory means stocks rally a bit, and a Trump election, they sell off substantially.  But I have greater conviction in a selloff in the latter event.

September 1, 2016

The S&P 500 was just about unchanged during August, ending the month down by 0.1%.  Not that it matters much in the overall scheme of things, daily index movements were also unusually subdued.  I find it somewhat more interesting is that the S&P was unable to break through the August high of 2190, peaking in the mid-2180s twice before falling back slightly each time.  Maybe we’re beginning to form a technical ceiling.

The sector breakout for the index during August is as follows:

Financials          +3.6%

IT           +1.8%

Industrials          +0.5%

S&P 500           -0.1%

Materials          -0.3%

Energy          -0.6%

Staples          -0.7%

Consumer discretionary          -1.4%

Healthcare          -3.5%

Telecom          -5.7%

Utilities          -6.1%.

The first thing I observe is that for the first time in a long time Financials–a sector whose profits benefit from higher interest rates–are in first place, significantly ahead of the index.  On the other hand, Utilities and Telecom, whose main attraction is high dividend yields (and which therefore are hurt by rising rates) are in the cellar.

Second, the most highly economically cyclical sectors, Industrials, Materials and Energy, outpaced less cyclical Staples and Consumer discretionary.  I’m not sure whether this is an issue of valuation or of conceptual appeal.  But the latter (my pick) would mean the market senses world economic growth is accelerating.  This is a precondition for interest rate rises.

So the main messages I read are that the market is getting a bit toppy and that we may be in for a sea change in the economic weather toward higher rates.

As I’m writing this, I’m seeing headlines suggesting that manufacturing in the US is flattening out.  My guess is that this is a function of pent-up demand for autos finally being exhausted and the recent dollar strength.  In other words, it’s more multinationals tweaking where they make things rather than a harbinger of incipient recession.

Unless the manufacturing news turns out to be significantly more serious than I now expect, I’d think the August pattern of relative performance will continue through the end of the year.

One other note:  September most often witnesses the start of yearend selling by mutual funds.  The usual pattern would mean seeing the S&P break back toward 2000 this month before beginning a significant rally in mid-October.   That wouldn’t be all bad, however.  Such times are ideal for for portfolio housecleaning, since they typically see strong stocks exhibit temporary weakness and perennial clunkers outperform.

August 1. 2016

July was a good month for the S&P 500, which gained +3.6% for July.  Sectorally, the returns break out as follows:

IT          +7.8%

Materials          +5.1%

Healthcare          +4.9%

Consumer discretionary          +4.4%

S&P 500          +3.6%

Financials          +3.4%

Industrials          +3.4%

Telecom          0.0%

Utilities          -0.7%

Staples          -0.9%

Energy          -2.0%.

What the numbers tell me:

–other than Staples, all the big sectors outperformed

–post-Brexit losers, IT and Materials, bounced back strongly

–relative gainers were the ones one might expect in a world that;s drifting upward, not barreling ahead

–sectors that have moved up a lot over the past year were relatively weak, namely, Telecom (+20.4% over the past 12 months), Utilities (+18.6%) and Staples (+8.7%)

–Energy was conspicuously weak, as short-term speculators who had been betting that the worst for crude was behind us, were burned again

–interestingly, Financials were up despite new evidence that interest rates will be “lower for longer,” and therefore that interest spreads on loans and deposits will remain squeezed as well.  My guess is that this sector has finally bottomed.  Michael Mayo, long-time banking bear, thinks this is so, too.

–there’s also no sign that the party conventions in the US have had any negative impact on stocks, despite both the continuing rift among Democrats between Hillary and Bernie supporters and the buildup of evidence that the lack of intellect Donald is revealing to the public is not a Stephen Colbert-like persona but the man himself.

My sense is that the market will drift sideways to up as we approach fall, with the same general performance pattern we are now seeing.  Once September begins, we’ll have to consider the possibility of yearend tax selling by mutual funds/ETFs.

July 5, 2016

The best I can do to quickly check on sector performance last week is to use ETF data.  Based on that, the winners and losers during the post-Brexit bounceback are:

Telecom          +4.5%

Healthcare          +4.1%

Utilities          +3.7%

Consumer discretionary          +3.6%

Staples          +3.4%

Industrials          +3.4%

S&P 500          +3.2%

Financials          +3.0%

Energy          +2.8%

IT          +2.4%

Materials          +0.7%.

The results aren’t what I would have guessed.  I’d been thinking that typical up-market sectors would be the stars.   What I see is something different:

–ex Materials, all sectors are clustered with a percent of the S&P

–Materials and IT, two sectors that usually perform best in up markets, are conspicuous laggards

–Telecom, which has issues of its own but is typically a defensive sector, retains its #1 position.  Healthcare, another defensive, is a second big winner

–Staples, Utilities, Energy and Materials lose relative strength, even though the last two are up-market sectors.  Staples and Utilities arguably negate the defensive = good signal given by Telecom and Healthcare

–Consumer discretionary, Healthcare and Financials all gain, even though the second has a defensive character and the third is the industry I think has the most to lose from Brexit

–IT usually does well when markets are rising.   But it underperformed and remained in ninth place.

All in all, not much to hang your hat on.  Maybe the market is really as confused as these numbers suggest.  If so, we’ll need more time for patterns to emerge.  To my mind, the potentially clearest signs from last week are that Energy has shifted from outperforming to underperforming and that Consumer discretionary has done the opposite.

July 1, 2016

June was a complex month.  During the first two weeks, stocks drifted lower on reports that polls of voting intentions in the UK referendum indicating the “Leave” alternative was in the majority and gathering strength.  Sentiment–and stocks–swung decisively in the opposite direction after the shooting of MP Jo Cox by a right-wing extremist.  Then came a sharp one-day+ plunge after the voting results were announced.  After that, markets began to recover.

If I were still working, I would be able to get performance attribution reports of the S&P 500 (for the world, for that matter) for each of these brief periods, stock by stock, industry by industry, sector by sector.  The most important, in my view, would be the recovery period toward month’s end.  But I’d at least glance at each of the others to see how market beliefs might have changed as new information became available.  I’d be looking for stocks, industries, sectors that were not following the herd.

The key question in all this, however, remains how the market patterns have changed since the Brexit vote.

I’ll try to work up this last bit over the weekend for next Tuesday’s post.  For today, though, here’s the performance breakout for the S&P 500 for the entire month of June:

Telecom          +9.3%

Utilities          +7.5%

Staples          +4.8%

Energy          +3.2%

Healthcare          +0.9%

Industrials          +0.8%

S&P 500          +0.1%

Materials          -1.1%

Consumer discretionary          -1.3%

IT          -2.8%

Financials          -3.4%.

The clear pattern here is defensive.  Two strong-economy sectors that had been performing strongly until June–Consumer discretionary and IT–are at the bottom of the pile.  Financials are the worst sector, on the notion that the potential breakup of the EU would be bad for loans on the balance sheets–specifically that Greece would most likely default on its sovereign debt as part of a possible Grexit.

My sense is that a review of the past week will show that, while Financials will have continued their sub-par performance, Consumer discretionary and IT will have turned in stellar results.  I’m willing to believe that IT outperformance–but not Consumer discretionary–will prove more than just a bounceback from oversold levels.

More on Tuesday.

June 1, 2016

In May, the S&P 500 continued the rebound from near-term lows it began in February.  The index reached a high of 2103 intra-day yesterday, before fading a bit in the afternoon.  This puts the S&P just below the formidable resistance line of 2100 – 2110 which has consistently capped market rallies over the past couple of years.

As the list below shows, three big sectors account for (more than) all the S&P’s gains for the month.

The May sector breakdown:

IT          +5.3%

Healthcare          +2.0%

Financials          +1.8%

S&P 500          +1.5%

Utilities          +1.0%

Staples          +0.6%

Consumer discretionary          0%

Telecom         0%

Materials          -0.6%

Industrials          -0.8%

Energy          -1.2%.

Five things about May stand out to me:

–the clustering around zero

–the extractive industries, which had been rebounding sharply from their 2014-15 slide, have, for the moment at least, cooled off.  This despite the continuing strength in crude oil–which suggests the oil rally may have run its course

–IT and Healthcare, two secular growth sectors, are at the top of the pile

–Consumer discretionary, which often keeps company with IT and Healthcare, was weak.  This is due, I think, to the significant presence of large traditional retailers who are on the wrong side of the digital divide and who are putting up poor earnings results.  In my view, this last is more a function of management failure to react strongly enough to (a) the threat of online commerce and (b) the absence of consumer borrowing to finance consumption than of a weak economy

–we’re back at 2100, where previous rallies have faltered.  A while ago, I was optimistic that the S&P could break through to the upside.  Now I’m not so sure.  On the other hand, I have no burning desire to raise cash, which would be the logical consequence of what I’ve just written.

Let’s see how June begins to unfold.

May 2, 2016

Ex dividends, the S&P 500 eked out a small gain for the month of April–small, as in +0.27%.  Better than a loss, though.

As I read it, on April 20th, the index smacked into the ceiling around 2010 that it has been establishing for itself over the past two years, failed–this time, at least–to penetrate it, and fell back.

Sectorally, the worst damage was done to the areas that have been the best performers over the past year or more.  Some of the damage to the S&P, however, was offset by continuing strength in the highly cyclical sectors that have been near-term market darlings.

Put another way, over the last third of the month traders sold the sectors where they had the most profits and put the money back to work in laggards exhibiting recent relative strength.

Results for the month, by sector, are as follows:

Energy          +8.7%

Materials          +4.9%

Financials          +3.3%

Healthcare          +2.9%

Industrials          +0.8%

S&P 500          +0.3%

Consumer discretionary          +0.1%

Staples          -1.5%

Utilities          -2.5%

Telecom          -3.1%

IT          -5.5%.

What information does this list contain?

My first reaction is that it’s white noise, with nothing one can safely conclude.  Looking a little closer, and making the scope of my observations more modest, what I see is:

–on a one-year view, Utilities, Staples, Consumer discretionary and Telecom are, in that order, the best-performing sectors.  Even including April’s underperformance, each has outperformed the index by at least 300 bp over the last 12 months.  These are the most likely targets for profit taking, so no information here.

–IT is a clear outlier, having underperformed by a large enough amount in April to wipe out all the relative gains (and more) made since April 2015.  I haven’t checked, but I think Apple, Intel and Microsoft have probably done the lion’s share of the damage.  This provokes two questions:  have AAPL, INTC and MSFT declined enough?; is the rest of the sector safe to buy/hold?  (My preliminary answers: for AAPL, no; for INTC, maybe; for MSFT, probably; for the rest, yes.)

–Healthcare is the most intriguing outperformer.  Maybe it’s finally out of the penalty box.

More on this topic in the main blog tomorrow.

April 1, 2016

The S&P 500 completed a successful month and a turbulent quarter yesterday.  For the opening three months of 2016, the index rose by 0.8% on a capital changes basis (meaning before factoring in dividends), which translates into a 1.3% total return (meaning including dividend payments).

During mid-February, however, the S&P had fallen as much as 12% from its yearend 2015 close before reversing itself and recovering all its losses plus a little bit.  A +6.6% rally in the S&P during March helped out.

sector returns

The sector breakout of S&P returns for the month of March and for the quarter as a whole portray two sharply different pictures, as the lists below show:

S&P 500 performance


Energy          +9.2%

IT          +9.1%

Utilities          +7.7%

Materials          +7.4%

Finance          +7.1%

Industrials          +7.0%

S&P 500          +6.6%

Consumer discretionary          +6.5%

Telecom          +6.3%

Staples          +4.3%

Healthcare          +2.6%.

For the month, the best performers were, generally speaking, the most highly cyclical.  Less economically sensitive sectors by and large lagged.  The one outlier is Utilities, perhaps the most defensive of the S&P sectors, which turned in substantial outperformance.  One other factor to note:  together Staples and Healthcare, the two biggest laggards, make up about a quarter of the market capitalization of the S&P 500.  The S&P ex those two sectors would have been up by about 7%.

Why is this important?  To me it shows that Energy and IT were the two powerful gaining sectors for the month.  The outperformance of Materials, Finance and Industrials is arguably more a result of the weakness in Staples and Healthcare than any great desire of investors to hold more of those sectors.


Telecom          +15.1%

Utilities          +14.5%

Staples          +4.9%

Industrials          +4.3%

Energy          +3.1%

Materials          +3.0%

IT          +2.2%

Consumer discretionary          +1.2%

S&P 500          +0.8%

Financials          -5.6%

Healthcare          -5.9%.

The three-month pattern shows the best outperformance by the most defensive stocks.  They are followed by the most highly cyclical sectors, which were the dogs of 2015.  The somewhat cyclical, which were last year’s darlings (and which I tend to prefer), lagged.  When all was said and done, the simplest road to outperformance in 1Q16 would have been to have no Financials or Healthcare.

Healthcare and Financials together comprise almost 30% of the S&P.  The S&P ex those sectors rose by about 2.5% for the quarter.  this suggests that IT and Consumer discretionary didn’t have as much oomph in them as their outperformance suggests.

The greatest gains duing 1Q16 would have come from holding only Telecom and Utilities.  Those two are miniscule sectors, however, comprising just over 6% of the S&P, even after their outsized 1Q16 gains.


During March, Telecom came back to earth and Staples responded positively but  sluggishly to the improving market tone.

Of the January-February laggards, Financials, IT and Energy made the best relative gains.

Utilities remained strong;  Healthcare remained in the doldrums.

what to make of all this

I don’t see a strong picture emerging from the 1Q16 data.  Actually, once I put this last sentence on the screen, I realized there is a clear picture–one of strength in highly cyclical stocks.  I just don’t believe it.

I’m interpreting the strength in Energy, Materials and Industrials as a bounceback from depressed levels, assisted by a rising crude oil price.  I think oil will have a very hard time rising above the current $40 a barrel, though.  So, while I think the overall global economy is in better shape now than a year ago, I’m content to play this through IT and Consumer Discretionary.  But since I’m betting against the short-term trend, I’ve got to monitor the highly cyclical sectors carefully.

March 2, 2016

the month, plus some

The S&P 500 bottomed on January 20th, rebounded a bit.  It returned to briefly break through the prior intraday low (1810 vs 1812) on February 11th before rising steadily to gain 6.7% from that point (around +9%, including yesterday, March 1st).  After all the dust cleared, the S&P posted a loss of 0.4% for the month.

As readers may have discerned from my cautious tone around the lows, I was very worried both by the extreme volatility in growth-oriented names at the beginning of the year, as well as the fact that the return to the lows occurred so quickly after establishing the initial low point.  In my experience, when the second, confirming, low occurs earlier than, say, six weeks past the first, chances are high that further lows, rather than a genuine rebound, is in store.  On the other hand, I can’t recall seeing a period as senselessly volatile–meaning out of the hands of prudent professional investors–as this one.  So it was hard to know what to think.

In any event, the strength of the rebound, and especially the strong price action of the stocks that had been pummeled early in the year, both argue that the upward movement since February 11th is for real–meaning a return to 1810 any time soon isn’t in the technical cards.

The key question now is how far the rebound can travel.  My off-the-cuff answer is that the index can easily approach the old highs.  Nice if it could break through and go farther, but I wouldn’t bet the farm this will happen.

S&P 500 performance


S&P 500 sector performance in February played out as follows:

Materials          +7.3%

Industrials          +3.5%

Telecom          +2.7%

Utilities          +1.4%

Consumer discretionary          +0.2%

Staples          +0.1%

S&P 500          -0.4%

Healthcare          -0.7%

IT          -1.5%

Energy          -2.6%

Financials          -3.2%.

The message in the S&P?  …a bounce in oversold Materials and Industrials + defensives.

so far in 2016

Year-to-date for the S&P:

Telecom          +8.3%

Utilities          +6.3%

Staples          +0.5%

Industrials          -2.5%

Materials          -4.1%

S&P 500          -5.4%

Consumer discretionary          -5.0%

Energy          -5.6%

IT          -6.4%

Healthcare          -8.3%

Financials          -11.9%.

Same story as for February alone:  defensives + a bounce in Materials and Industrials.  Two  striking sectors:  Financials, on the bottom for both months; Energy, still underperforming despite strength in its typical running mates Materials and Industrials.

one year

Let’s go for one more list, the past 12 months:

Utilities          +2.3%

Telecom          +2.2%

Staples          +1.4%

Consumer discretionary          -1.9%

IT          -5.8%

S&P 500          -8.2%

Industrials          -8.3%

Healthcare          -8.4%

Financials          -13.4%

Materials          -18.7%

Energy          -26.7%.

In hindsight, and not simply due to January + February of this year, the past twelve months have been great for defensives and horrible for the most highly cyclical areas.

Two more factoids:

12 month performance of the S&P, ex Energy:   -6.6%

12 month performance, ex Financials:   -7.2%.

These two large sectors have been the most significant drags on the index.  Having no Energy would have produced a +1.6% gain over the S&P during the past year, assuming the rest of the portfolio matched the market.  +90 basis points for having  no Financials.  These are both very large amounts.

More tomorrow in the main blog.

February 1, 2106

…at least it’s over.

In some ways, January was a classic month;  in some ways it was very peculiar.

In technical terms, we broke through the lows of August and September of 2015 last month, reaching and testing the lows of April 2014, almost two years ago.  This was classic.

To the degree that I can interpret the emotional to-ing and fro-ing of the market, the S&P seems to be saying that we’re not yet through validating the overall direction of the market since 2013.  2013 was the year in which the price/earnings multiple of world stock markets reexpanded from its prior, recession-induced compression back to what I would call normal.  Since then the S&P has been going basically sideways.  The bounceback off the April 2014 lows–I’m assuming for the moment that we don’t break down below them in the coming month or two– seems to be saying that investors are content to be in the most unusual situation of running in place for over an extended period of time.

The sectoral composition of the S&P for the month is the peculiar, and interesting, thing.  It’s as follows:

Telecom          +5.5%

Utilities          +4.9%

Staples          +0.5%

Energy          -3.1%

IT          -4.9%

S&P 500          -5.1%

Consumer discretionary          -5.2%

Industrials          -5.8%

Healthcare          -7.7%

Financials          -9.0%

Materials          -10.6%.

Sectors seem to fall into four groups:  –the defensives as strong outperformers;

–Energy in its own world, continuing to fall but for once doing better than the market;

–IT, Consumer  discretionary and Industrials (!?!) clustered around the index;

–and a motley crew at the bottom.  Healthcare was a stellar performer last year, so a negative January reaction was always in the cards.  Materials seems to be saying we shouldn’t look for great economic strength in 2016.  As usual, I have nothing meaningful to say about Financials.

Why peculiar?  In one sense, this sector breakout is very defensive.  But Energy and Healthcare results don’t fall in line; they seem not to be driven by economics, but by a partial technical reversal of their fortunes in 2015.  And IT + Industrials performed better than I would have expected.  Why weren’t they closer to Materials?

What am I looking for in early February price action?  I’d like to see more confirmation that the market is content to remain in the sideways channel–with a slight upward bias–that it has been in for the past two years.  I’m also going to watch carefully for new patterns that may be emerging post the lows of January 20th.

January 4, 2016

Happy New Year!!!

In hindsight, 2015 was a surprisingly calm and orderly transitional year.  Not all (actually, not any) of the anticipated movement from the monetary intensive care ward toward even a regular hospital room occurred.  That’s left for 2016.  And 2015 may have been “risky” in the convoluted academic sense that intraday volatility among US stocks and the S&P 500 were unusually high (who outside the ivory tower cares?). But world economies did continue to heal.

The S&P basically went sideways for the year.  It was up by 1%+ on total return (i.e., including dividends) basis, down -0.73% on capital changes alone (without dividends included).

The sector breakout of returns was more interesting than the final result.  It was as follows:

Consumer discretionary          +8.4%

Healthcare          +5.2%

IT          +4.3%

Staples          +3.8%

S&P 500          -0.7%

Telecom          -1.7%

Financials          -3.5%

Industrials          -4.7%

Utilities          -8.4%

Materials          -10.4%

Energy          -23.6%.

In back of the envelope terms, a portfolio that no Energy sector stocks in it should have been up by around +1.2% on a capital changes basis; avoiding Materials too would have added another 25 basis points or so.

I tend to read this sector performance in one of two ways (in either scenario, Telecom and Utilities, two tiny sectors, march to their own drummer).  Both may be true.

–Anything directly connected with the collapse in mining commodity prices did badly.  Everything else did ok.

–The sectors that prosper when the world is expanding at a moderate clip did fine.  The ones that do best when world GDP is white-hot did poorly.

I suspect the sector performance pattern that characterized 2015 will remain in place for a while.  The key investment question for us is when it will begin to reverse itself.  If historical form holds true (what else do we have to go on?), performance reversal will not be based on a significant improvement in near-term prospects for oil or metals.  Instead, it will led by value-oriented investors and be based on the belief that stock prices already discount more than the worst that’s likely to happen.  The first clue we’ll have that this is taking place is when stock prices in mining commodity sectors no longer decline on bad news.  This is something to watch carefully.

December and January tend to be strongly influenced by tax selling.  Because of this, they tend not to have loads of information about what the market is thinking.  For what it’s worth, December played out like this:

Staples          +2.5%

Utilities          +1.9%

Telecom          +1.7%

Healthcare          +.16%

S&P 500          -1.8%

Industrials          -2.2%

IT          -2.3%

Financials          -2.4%

Consumer discretionary          -3.0%

Materials          -4.4%

Energy          -10.0%.

Defensives did well.  Large chunks of the full-year damage to Energy and Materials happened in December, presumably as taxable investors dumped out their losing positions.  IT and Consumer discretionary were hurt, perhaps for the same reason.

As I’m writing this before the open in New York, it appears that sellers will dominate the day.  This is the norm, with or without new news.  Without any influence from news, one would expect selling in last year’s winners and at least some buying of 2015’s losers.  It will be interesting to see what actually takes place.

December 1, 2015

(deep) in the home stretch

Looking back at the trading pattern of the S&P 500 over the past few months, we can, in hindsight, see the typical pattern of pre-fiscal yearend selling by mutual funds as being behind the market’s August-September swoon.  If that’s not forcing the issue, we can also interpret the upward movement that followed as the typical relief rally that happens after mutual funds close their books.

I’m not convinced that’s completely correct, since the “rally” was powered mostly by one group, and an unlikely one at that, commodities stocks.  Still, November does look a lot like the S&P is entering its end-of-year coasting period a bit early.

What makes this more than a random musing is that it would imply the market could care less that the Fed is about to begin raising interest rates.  In my view, this last should be true, at least.

In any event, the S&P barely eked into the black for the month of November, posting a 0.1% gain on a capital changes basis for the month.  The sector breakout is as follows:

Financials          +1.7%

Industrials          +0.6%

IT          +0.6%

Materials          +0.6%

S&P 500          +0.1%

Consumer discretionary          -0.4%

Healthcare            -0.6%

Energy          -0.8%

Staples           -1.3%

Telecom          -1.3%

Utilities          -2.8%.

The oddity that I see in these results is that almost all the losing sectors are defensive groups.

In a very real sense, for professional investors 2015 is over already.  The main task at hand is to prepare for what 2016 will bring.  I’ll be writing about this in my annual Strategy posts over the next few days.

November 2, 2015

an October rebound

October was a rebound month for the S&P 500, based in good part on strength in the beleaguered commodities complex.  The 8.3% gain in the index for the month was enough to put it back in the black (+1.0%) for the year to date.

Returns by sector for the S&P 500 were as follows:

Materials          +13.5%

Energy          +11.3%

IT          +10.7%

Industrials          +9.1%

Consumer discretionary          +9.0%

S&P 500          +8.3%

Healthcare          +7.7%

Financials          +6.1%

Telecom          +5.8%

Staples          +5.6%

Utilities          +1.0%.

bullish results

Looking simply at the sectoral breakout for the month, the very strong sectors are all beneficiaries of rising GDP–both globally and in the US.  The relatively weak sectors (all ten sectors were in plus territory in absolute terms) are the defensives, which typically perform relatively well when GDP growth is either non-existent or weak.

Is this really what we want to take from the S&P’s performance?  After all, the media are loaded with stories of macroeconomic problems around the world.

I don’t know.  However surprising they may be, pro-GDP growth is how the numbers play out.

We might look at the figures in a slightly different way.  Let’s assume that the outstanding feature of October is a technical rebound in the commodities stocks (Energy, Materials and the Industrials that provide the first two with capital and operating equipment). Ex these sectors, the S&P’s gains for October would be about +6%–meaning that Healthcare and possibly Financials would also be outperforming areas.  Again, though, it’s the most defensive areas–Telecom, Staples and Utilities–that remain on the underperforming list.  So trying to isolate the influence of rebounding commodities stocks from the rest of the index doesn’t dilute the apparently bullish sectoral message from the S&P last month.

October may be a fluke.  However, the apparent bullish tendency of the stock market is something to keep an eye on.  November will doubtless shine more light on the situation.

implications for commodities?

Does the October performance of Energy, Industrials and Materials signal a significant change for the better in the outlook for commodities companies?  Maybe, although I don’t think so.  I think these sectors face years of consolidation before their profits will be on a steady upward course again.

…a bottom for these stocks?  In relative performance terms, I don’t think so either.  I interpret the October performance of commodities-related stocks as simply the typical two-steps-in-one-direction, one-step-in-the-other pattern of stock price movements.  I think the commodities sectors will continue to trend relatively weaker for a long time, and that what we’re seeing is simply a short-term technical rebound.  In absolute terms, it’s trickier to say.  It’s possible (not my base case, however) that the way these stocks express their underperformance is by remaining flat in a generally rising market.

In short, I feel no desire to sift through the rubble in these sectors yet.   For what it’s worth, were I to change my mind, I’d try Industrials first, Energy next and Materials last.

other thoughts

October seems to me to make one thing plain, though.   The pummeling that stocks took in August and September was a correction, not the onset of a bear market.

Let’s see what November brings.

October 1, 2015

September was an improvement in relative terms for stocks vs. August, but not in the absolute.  The index fell by 2.6% for the month, capping off a third quarter in which equities gave back at total of -6.9%.

The sectoral breakout for the month, and for the quarter, show clear patterns, however.  The numbers look like this:


Utilities          +2.6%

Staples          +0.2%

Consumer discretionary          -0.8%

IT          -1.1%

Industrials          -2.0%

S&P 500          -2.6%

Financials          -3.2%

Telecom          -3.7%

Healthcare          -5.9%

Energy          -6.8%

Materials          -7.6%.

third quarter

Utilities          +4..4%

Staples          -0.9%

Consumer discretionary          -2.9%

IT          -4.1%

S&P 500          -6.9%

Finance          -7.2%

Industrials          -7.4%

Telecom          -8.0%

Healthcare          -11.1%

Materials          -17.3%

Energy          -18.1%.

Looking at the third quarter figures, several things jump out:

–IT, which typically underperforms in a down market, is holding up surprisingly well

–Healthcare, which is typically defensive, is very weak.  To my mind, the sector is reacting to sky-high valuations caused by its relentless outperformance in prior quarters, so its weakness has no macroeconomic implications

–although Energy makes up only about 7% of the S&P’s capitalization, that sector accounts for almost 20% of the index loss for the quarter

–sectors that are US- or EU-centric are outperforming, those that depend on widespread global growth, particularly mining commodity-related, are doing poorly.

my conclusions

The performance patterns say to me that the market is continuing to discount the end of the China-fueled commodity supercycle that drove natural resource growth over the decade ending a year or two ago.  Yes, the handwriting has been on the wall–in CAPITAL LETTERS–for a couple of years. So why now?  I think what we’re seeing is that true believers, people whose recent experience has taught them that natural resources always rebound, are giving up hope.   Put in a less dramatic fashion, they’re finally smelling the coffee.

How badly does the current downturn/capitulation damage prospects for global equities?

Not terminally, in my opinion.  More tomorrow.

September 2, 2015

August was a cruel month for stocks, with the S&P 500 index falling by -6.3%.  No industry was left unscathed; the “best” results came from the Telecom sector at -3.4%.

The breakout of sector results for the entire index is as follows:

Telecom          -3.4%

Utilities          -4.0%

Energy          -4.7%

Industrials          -5.0%

Materials          -5.8%

IT           -5.8%

Staples          -6.0%

S&P 500          -6.3%

Consumer discretionary          -6.6%

Financials          -6.9%

Healthcare          -8.1%.

The first and most obvious conclusion from this list is that last month was less about sectors and more about the valuation of stocks as an asset class.  The selloff touched every sector in a significant way.

If we measure from intraday high to intraday low, which is the method I prefer, there have been several 10% declines in the S&P 500 over the past few years, contrary to the assertion of talking heads who look at (or whose assistants look at) daily closing data only.  August, where the difference between the intraday high on August 3st and the intraday low on August 24th was 11%+, feels a lot worse to me.  We’re still experiencing what might be called aftershocks from that decline.  I hesitate to use the word, however, since it suggests that the worst is behind us.  Maybe so, maybe not (my imperfect reading of the charts suggests that a further slide to 1860 or so may be in the cards).

My primary reason for caution is that I genuinely don’t know what will happen.  However, we’re at the edge of the mid-September-mid-October period of yearend mutual fund selling (most funds have a fiscal year than ends on Halloween), done to control the amount of the yearly distribution of realized profit to shareholders.  We’re also very close to the first likely date when the Federal Reserve may begin raising interest rates in the US off life-support lows.  It would be very difficult, I think, to find an investor who is not long since aware of this last possibility—or, for that matter, that China has been slowing for two years or more.  Still, the market seems recently to be discounting all over again even the most obvious phenomena as they occur, as well as in advance.

In the past, discounting bad news over and over has been a signature characteristic of bear markets.  I find it hard to know whether the same holds true now, or whether algorithmic trading has shifted the market’s discounting mechanism away from anticipation and more toward the actual announcement of new information.  September will doubtless tell us more on this score.

Other important information in the pattern of relative performance by sector during August?  If so, I don’t see it.  To my mind, August was simply a backwards month for sector returns, one where the leading sectors of the last year or more lagged and the dogs of the recent past have had a Pyrrhic day in the sun.  Like a restatement of “You can’t fall off the floor,”  except that in absolute terms everybody did.  I don’t think August provides a snapshot of what sector performance will look like once the present selling has run its course.

August 3, 2015

Somehow I missed writing KS for June.  Oh well.

Let’s start by looking back over the past year to see what patterns determined market performance.  The sector breakout for the S&P 500 (both with the Energy sector and my back of the envelope estimate for index performance ex Eneergy) is a s follows:

Healthcare          +25.6%

Consumer discretionary          +21.8%

Staples          +16.2%

Financials          +12.3%

S&P 500 ex Energy          +12.0%

IT          +11.3%

S&P 500          +9.0%

Utilities          +6.6%

Industrials          +4.6%

Materials          -6.2%

Telecom          -6.5%

Energy          -27.7%.

The losses from the Energy sector, caused by the fall in the oil price, are astounding.

Outperformance by Healthcare and Consumer discretionary + underperformance by Materials and Industrials are what one might expect in a world that’s growing, but not by much.

The sector that catches my eye is Staples, which has managed to outperform despite large exposure to the EU and changing consumption habits by Millennials.  My guess is that the recent rally in Staples (see July performance below) comes from belief that we’ve passed the lows for the euro vs. the dollar, with a hint of M&A thrown in.

At some point, this performance pattern will reverse itself.  Invariably, the turn comes when investors least expect it.  Typically, valuation is the motive force, not the idea that improvement is imminent.  Still, I think the inflection point is still a ways away.

I find the July figures less informative.  They are as follows:

Utilities          +6.0%

Staples          +5.3%

Consumer discretionary          +4.7%

Financials          +3.0%

IT          +2.9%

Healthcare          +2.7%

S&P 500          +2.0%

Industrials          +0.1%

Telecom          -1.1%

Materials          -5.0%

Energy          -7.8%.

The broad pattern of returns is the same for July as for the entire past year–underperformance by those most highly linked to a booming world economy.  All of the absolute gains from Utilities (a proxy for the bond market) for the past year came in July.  So too did the lion’s share of the outperformance by Staples.  I understand that income-oriented investors are attracted to Utilities, but I don’t understand their recent allure.  Staples, though, are giving an important signal of better times in the EU, I think.  Industry consolidation is another plus.

June 1, 2015

The S&P 500 gained +1.1% in May, bringing its year to date advance to +2.4%.

If we look back from last summer until now, two things jump out to me:

–the upward trajectory of the market has moderated substantially, and

–the monthly fluctuations of the S&P 500 have become smaller.  Specifically, the past three months’ index changes have been +1.1%, +0.9% and -1.7%.  Prior to that, the average change was +/- 2.8%

Three reasons:

–corporate profit growth has slowed, due mainly, I think, to the strength of the dollar and the plunge in oil prices (Energy stocks make up slightly less than 10% of the S&P 500)

–price earnings multiple expansion/recovery from its severely oversold condition of 2009 was completed eighteen months ago, meaning that the market is fairly valued on a PE basis and that earnings growth is the main driver of index gains, and

–the market is finally beginning to seriously consider what will happen as the Fed begins to raise short-term interest rates from the present emergency lows.

The performance of the S&P by sector last month is as follows:

Healthcare          +4.3%

IT          +2.0%

Financials          +1.6%

Consumer discretionary          +1.2%

S&P 500          +1.1%

Staples          +0.7%

Materials          +0.3%

Industrials          +0.1%

Utilities          +0.0%

Telecom          -1.9%

Energy          -5.2%.

what catches my eye

–last month’s big winners, Energy, Telecom and Materials, are this month’s laggards, and vice versa.  Not a huge surprise if , as I believe, we’re in a sideways market. But if we look on a two-month basis, Energy and Telecom gave up all their April relative gains (and a bit more) in May; Materials didn’t.  Similarly, Healthcare more than made up its April losses in May.  Materials and Healthcare have stronger price momentum than Energy and Telecom.

–IT outperformed in both months, giving me encouragement to continue to hang in with my IT overweight.

–my guess is that the May pattern is a blueprint for what the market will look like over the coming months.  I’ve had higher hopes for Staples, which has considerable EU exposure, on the idea that Europe is past the worst.  But while the status of Greece is still an issue, it looks as if investors don’t want to anticipate any favorable news until Grexit is behind us–one way or the other.

May 4, 2015

The stock market, like most other things in life, resembles a baseball game to a considerable degree.  Ultimately, everyone gets a chance to come to bat.

That’s what April on Wall Street was all about, in my view.  The S&P 500 gained .85% for the month.  The sectoral breakout was somewhat different from what we’ve seen over the past half year, however.  Here it is:

Energy          +6.6%

Telecom          +4.7%

Materials          +3.1%

IT          +2.3%

S&P 500          +.9%

Industrials          -0.1%

Consumer discretionary          -0.1%

Utilities          -0.5%

Staples          -1.0%

Healthcare          -1.4%.

So, Healthcare got clobbered and Energy + Materials shot through the roof.

I don’t think this signals a change in trend.  I read this as simply an expression of the market’s belief (and who are we to argue with the market) that the leading sectors have gotten a bit stretched in valuation vs. the laggards.  So last month the leaders played defense and the laggards got their turn at the plate.

The market always works in a two (or three) steps forward, one step backward fashion, whether we like it or not.

I’m never certain about Healthcare, so I just maintain a large position in a Healthcare mutual fund, but my guess is that we’ll soon see Consumer discretionary and IT leading the pack.  If it is correct that the euro has bottomed against the dollar, it’s my view, Staples has a chance to join them as well.

April Fool’s Day–or should it be Fools’?

The opening quarter of 2015 was a lot like an amusement park ride–up and down, up and down  …and a return to where it all started.

If Wall Street were Disneyworld, we’d have spent a lot of money for the privilege of being taken for a ride.  We’d also most likely have a strong felling of contentment for having had the experience.

Personally, I don’t feel too perturbed.  I also think we’re in for a repeat performance in 2Q14 and beyond, before the end of summer brings the promise of a rising market again.  Also, if the choices are either sideways or down–and I believe that’s what they are–I’ll pick sideways any day.

Before trying to figure out sectoral patterns within the market, let’s look at the S&P 500 performance:


Healthcare          +0.8%

Consumer discretionary          -0.6%

Financials          -0.8%

Utilities          -1.3%

S&P 500          -1.7%

Energy          -2.0%

Staples          -2.4%

Industrials          -2.7%

IT          -3.4%

Telecom          -3.8%

Materials          -5.0%.

Only one sector, Healthcare, in positive territory for the month.  Highly cyclical stocks taking up the rear.

year to date

Healthcare          +6.2%

Consumer discretionary          +4.3%

S&P 500          +0.4%

Materials          +0.4%

Staples          +0.4%

Telecom          +0.3%

IT          +0.2%

Industrials          -1.4%

Financials          -2.5%

Energy          -3.6%

Utilities          -6.0%

On a three-month view, the index sectors fall into three groups:  big winners, Healthcare and Consumer discretionary; big losers, Industrials, Financials,Energy and Utilities; stuff in the middle= everything else.

Healthcare and Consumer discretionary, the most defensive of the cyclical stocks–and the ones with the most secular growth potential–are winners for both periods.

Industrials and Staples, the first highly cyclical, the second with secular problems plus loads of euro exposure, are two-time laggards.

My sense is that this is as it should be–and will continue to be for a while.

IT, which I like, is “eh” so far in 2015, after having suffered serious damage in March.  I’m content to hold what I have, shading my exposure toward social media through ETFs.

We have five reversals of form in March,–three positive and two negative.

Utilities showed some defensive strength during March after being clobbered earlier in the year; Energy went from being a big relative loser to being a small one; Finance was a relative winner last month, though still in the minus column in absolute terms, after being pummeled earlier.  My take is that these reversals are no more than the ordinary two-steps-forward-one-step-back rhythm of the market–except that for these three, it’s more likely two steps forward, three steps back.

Telecom and Materials went from Cy Young to sayonara, as they say in baseball.  I have no particular urge to buy either, although I suspect Materials will fare worse than Telecom in the coming months.

To sum up:  I expect 2Q15 to play out a lot like 1Q has.  I think Consumer discretionary will continue to do well.  There’s a possibility that the euro has bottomed against the dollar–if so, Staples will perk up.  I’d continue to avoid Energy and Materials.

Otherwise, individual stock selection will probably be more important than sector selection at least until midyear.  It’s also not a time, in my view, to make extreme bets.  Getting through the next few months without taking on much water is more important than racing ahead.

March 2, 2015

The sawtooth pattern of the past few months continues!

In February, the S&P 500 reversed its January form, tacking on a whopping 5.5% gain for the month.  That brought the S&P back into the plus column–as well as within spitting distance of the consensus price target (as well as mine) for the index for the full year.

Economic runes thrown and political entrails examined proved more favorable last month than in January, but we might as easily have predicted the February outcome from the seesaw chart pattern.

The way the sectors played out:

Consumer discretionary          +8.5%

IT           +7.9%

Materials          +7.8%

Telecom          +6.6%

Finance          +5.7&

S&P 500          +5.5%

Industrials          +5.2%

Staples          +4.2%

Healthcare          +4.1%

Energy          +3.5%

Utilities          -7.0%.

What I see:

–unusually strong gains, almost across the board (i.e., ex Utilities).

–aggressive sectors did well, defensive ones less so.  Last year’s darling, Utilities, returned to the form it has exhibited throughout the past half-decade, ex 2014.  It got clobbered.

–domestic vs. international doesn’t seem to have made much difference

–although not shown by the sectoral breakdown, small-cap stocks and large-cap did almost equally well

–growth significantly outperformed value–as it has been doing since mid-January

–among last year’s losing sectors, Materials and Telecome shone; Industrials and Energy continued their underperforming ways.

–Consumer discretionary and IT gained a lot.  Both were more than two percentage points ahead of the the index for the month, after having underperformed by a much smaller amount in January.

Where to from here?

I don’t see any reason to think the current up-one-month, down-the-next pattern won’t continue.  Sectoral out- and underperformance, too.

Of course, I’m always going to go for growth over value–and maybe small over large (both being the default positions for growth-oriented professional PMs).  But it’s also the typical pattern for a market several years past the end of recession.

In addition to favoring companies exhibiting superior earnings growth, the idea that market gains will be sub-par this year implies we should continue a buy-the-dips trading strategy and definitely avoid chasing recent outperformers.  Wait, instead, for them to come back to earth.

February 2, 2015

2015 got off to a rocky start for the S&P 500, which declined by 3.1% for the month.  Falling oil prices, Greece appearing again as a potential dealbreaker for the euro, currency volatility and continuing signs of weakness in non-US economies were all negative forces working to depress the index during the month.

The sectoral breakout for the S&P during January is interesting.  It is:

Utilities          +2.3%

Healthcare          +1.2%

Staples          -1.3%

Materials          -2.0%

Telecom          -2.2%

S&P 500          -3.1%

Consumer discretionary          -3.1%

Industrials          -3.7%

IT          -3.9%

Energy          -4.9%

Finance          -7.0%.

With the exception of Materials, all the outperforming sectors are the traditional defensive ones, whigh exhibit relatively stable, non-cyclical earnings growth profiles.  Staples stands out–an outperformer despite its heavy exposure to a declining euro.  The pattern of defensives first also follows the same theme that played out over most of 2014.

On the underperforming side, continuing Energy weakness is understandable.  The sector that jumps out, however, is Financials.  I don’t claim to be an expert here–in fact, I typically have no active exposure to the sector and, embarrassingly, hadn’t picked up on how badly it has been doing.  I presume the weakness is a compbination of possible expsure to dud energy loans on the part of domestic banks, and exposure to weak economies/currencies abroad.

Not, too, about January that a majority of sectors were clustered closely around the index.  The outliers–Utlities, Healthcare, Energy and Financials–presumably contain the most information about the market’s mood.

Throughout last year I read the defensive structure of the S&P’s sectoral performance as representing principally sector rotation.   I saw the market tone as being generally bullish but being overridden in the performance derby by the cheap valuation of defensives.  I thought the defensive sectors were simply catching up after having lagged behind badly in prior years.

I’m not sure that’s still true.  I read January performance as demonstrating the market mood has turned considerably more cautious.  This is partly due to valuation, I think, partly to lack of signs of economic strength abroad, and partly to the market’s surprising (to me, anyway) inability to parse out the implications for corporate earnings of a higher dollar and lower oil prices.  I think investors will have a much better view of the equity playing field at the end of the current quarterly earnings reporting season.  At least until then, I’d expect continuing turbulence.

January 2, 2015

Happy New Year!!!

TheS&P 500 moved sideways in December, to end a year in which the index produced a total return of 13%—far more than most observers, myself included, had expected.

I don’t see much information in the sector returns for the month, which played out as follows:

Utilities          +3.2%

Financials          +1.6%

Consumer discretionary          +0.8%

Energy          +0.3%

Industrials          -0.3%

S&P 500          -0.4%

Materials          -0.9%

Staples          -1.4%

Healthcare          -1.5%

IT          -1.7%

Telecom          -6.2%.

I have no idea why Utilities were so strong last month.  I imagine the potential for sharp wireless price competition is behind the considerable fall in Telecoms.  Energy’s outperformance probably only shows the triumph of valuation over concept.  My hunch is that this is just a temporary victory, particularly because we’re fast approaching the weakest season for crude oil demand.

For 2014 as a whole, the S&P sectors performed as follows:

Utilities          +24.3%

Healthcare          +23.3%

IT          +18.2%

Financials          +13.1%

Staples          +12.9%

S&P 500          +11.4%

Consumer discretionary          +8.1%

Industrials          +7.5%

Materials          +4.7%

Telecom          -1.9%

Energy          -10.0%.

Energy and Telecom each had its own well-known loser story.  What the rest of the underperformers have in common is their direct relationship with overall economic growth.

In contrast, all the 2014 winners, except IT, were the least economically sensitive areas.  IT had several supporting factors that overcame its cyclical nature:  ecommerce, social networking, corporate spending on software, corporate replacement of aging PCs.

Tax-related selling both by individuals and taxable institutions like insurance companies is a key feature of both December and January.  So it’s a mistake, I think, to read too much into sectoral performance patterns for either month.  Still, I think Consumer discretionary and Energy are sectors to keep an eye on for evidence of their bottoming.  If, as I’ve suggested in my 2015 Strategy, this year will be a year of only mildly positive returns, sector rotation based on relative valuation has the potential to be a much more important factor in performance than it has been over the past several years.

December 1, 2014

Happy Cyber Monday!!

The S&P 500 was up by 2.5% in November–a successful month in a year that, so far, has been better than almost anyone (me included) had expected.  Year to date, the index has gained 11.9%.  Add another 2% to account for dividends to get a total return.

Factor out the negative effect of lower oil prices on the Energy sector and we get S&P 500 ex Energy results:  November = +3.2%; ytd  = +13.5%.   An unusually big difference!

For the month, the sector breakout of the S&P 500 is as follows:

Staples          +5.3%

Consumer discretionary          +5.3%

IT          +5.0%

Healthcare          +3.2%

Industrials          +2.8%

S&P 500          +2.5%

Financials          +2.1%

Materials          +1.7%

Telecom          +1.1%

Utilities          +0.7%

Energy          -8.9%.

Year to date, the figures are:

Healthcare          +25.1%

Utilities          +20.4%

IT          +20.3%

Staples          +14.4%

S&P 500            +11.9%

Financials          +11.3%

Industrials          +7.9%

Consumer discretionary          +7.2%

Materials          +5.6%

Telecom          +4.6%

Energy          -10.3%.

If we score the sectors on their strenth in November vs. their ytd performance, we get the following:

–Healthcare, IT and Staples are winners in both periods

–Materials, Telecom and Energy are losers in both

–Consumer discretionary and Industrials are uptrending–meaning + for November and – ytd

–Utilities and Financials are downtrending.

Two sectors catch my eye.  One, of course, is Energy, which continues to deteriorate.  Usually, given such a sharp decline in price, one’s instinct is to think in contrary fashion and consider buying.  However, given the strength of the negative reaction to last week’s OPEC meeting–which ended with a highly predictable result–I’m thinking of lightening my (small) holding even more.

The other is Staples, which is highly international and has a lot of exposure to the weakening euro and yen.  Still, the sector continues to hold up well.  This implies to me that the stock market has a more favorable view of foreign economies than the consensus.

Remember, December is a housecleaning month.  Performance patterns are most often influenced by institutions’ decisions to jettison losers and to reposition themselves for the following year.  We should be doing the same.

My Strategy for 2015 posts will be starting this week.

November 3, 2014

October was a weird month.

Four key influences:

–the 10% decline in the S&P 500 that began in mid-September continued through mid-October.  As soon as the index touched/breached the down 10% mark, however, it promptly reversed course and recovered all its losses before month-end.  That’s the way stocks work–the unexpected sometimes happens.  What I found unusual, though, was that market commentators who had been calling for such a “correction” didn’t greet it with anodyne observations that the selloff was healthy and necessary–they were scared out of their wits.

–oil prices didn’t exhibit their usual seasonal strength in preparation for the heating season north of the equator.  They fell instead, as increasing shale oil production tipped the planet into oversupply.  (in our usual government-encouraged, shoot-yourself-in-the-foot fashion, Americans promptly resumed buying gas-guzzling gigantic SUVs like there’s no tomorrow.)

–on the 9th of the month, the CEO of Microchip Technology, Steve Sanghi, preannounced weak September-quarter results and said they presaged a semiconductor industry correction that would last six months.  Three weeks later, Mr. Sanghi declared that the downturn was over and that business had returned to normal.  Chip stocks fell sharply on the news, but most, ex MCHP, recovered the bulk of their losses before Halloween.

–near month-end, the Bank of Japan said it was all in on creating inflation (after denying earlier it would do so) by saying it would flood the country with money until the price level showed 2% growth–something not seen in the past quarter-century.  Yes, this will weaken the currency and worsen the lot of ordinary citizens who have to pay for food and fuel with yen that has already depreciated by about a third, but…  Markets saw this move as sort of tag team wrestling, with the BoJ replacing the Fed in the monetary accommodation ring.

With all these factors stirring the pot, here’s how the S&P played out by sector during the month:

Utilities          +7.9%

Healthcare          +5.3%

Industrials          +3.7%

Staples          +3.4%

Finance          +2.9%

S&P 500          +2.3%

Consumer discretionary          +2.1%

IT          +1.7%

Telecom          -0.2%

Materials          -2.6%

Energy          -3.0%.

What I see:

–starting with the simplest observation, despite all the media gloom and doom, the S&P ended the month with a healthy gain

–it’s clear why Energy is in the losers column (without oil prices showing strength, it’ll probably stay there.  Any sign of strength apart from this will likely mean investors are becoming seriously defensive and looking for a bombed out sector to hide in.)

–it’s understandable why IT lagged.  Watch to see if it reverses form.

–ex Industrials, the winners for the month are all defensives, despite the overall index gain for the month.  Actually, ex Energy, the index was up by 2.6% in October.

out of reverse, but back only in low gear?

That’s mu guess.  On the one hand, people can’t sustain indefinitely the angst necessary for a significant market decline   …and a lot of negative emotional energy was expended during the correction.  On the other, we’re right back at valuations where near-term earnings prospects made aggressive buying problematic.  In addition, we’re coming closer to the end of the year, so professionals will be in bonus-preservation mode and therefore leery of making big portfolio changes.

October 1, 2014

The S&P 500 lost 1.6% in September, bringing the final third quarter performance tally back to +0.6%.

To my mind, the key factor in determining these results–one that really jumps out–was the behavior of the Energy sector, which comprises about 10% of the S&P.   Weakness there subtracted almost a percentage point from index performance over 3Q, clipping a whopping 0.8% from September results alone.

The sectoral breakout of S&P results for September, and for the third quarter, is as follows:


Telecom          +0.4%

Healthcare          +0.3%

Staples          +0.3%

Financials          -0.5%

IT          -0.8%

Industrials          -1.3%

S&P 500          -1.6%

Materials          -1.7%

Utilities          -2.2%

Consumer discretionary          -2.9%

Energy          -7.6%


Healthcare          +5.0%

IT          +4.3%

Financials          +1.9%

Telecom          +1.8%

Staples          +1.3%

S&P 500          +0.6%

Consumer discretionary          -0.1%

Materials          -0.3%

Industrials          -1.6%

Utilities          -4.9%

Energy          -9.2%.

In hindsight, the ideal portfolio structure for either period would have been to overweight Healthcare and IT, while avoiding Energy.  Better would have been to also avoid Materials and Industrials, sectors which fare best when the world economy is growing strongly.  Simply having no Energy would have been good enough.

The sector that has me slightly scratching my head is Staples, which is in the Outperformers section, even though it should be suffering both from weakness in EU sales, caused by the decline of the euro vs. the dollar.  Part of that is the negative influence of Energy on the index level, but still…

My current attitude is why argue with success.  The rise of shale oil and gas production will continue to call the high cost structure of conventional energy companies into question.  Slowing world economic growth and the likelihood that interest rates will begin to rise in the US next year both suggest that future index gains will be modest  …and that investors will seek out beneficiaries of structural change rather than companies that shine when the world is in rude economic health.

So I think IT and Healthcare will continue to outperform, although absolute gains may be modest.  Energy and Materials will continue to struggle.  Growth names will do better than value.  Good individual stock selection within favorable industries will, at least for now, reap the highest rewards.

September 2, 2014

another month in the plus column…

…despite Wall Street worries about stretched valuations, only gradual increases in GDP in the US, economic doldrums both in the EU and Japan, and turmoil in emerging economies.  For the month, the S&P 500 gained +3.8%, bringing the year-to-date advance, on a capital-changes (i.e., without counting dividends) basis to +8.4%.  In fact, the S&P ended the month just north of the psychologically important index level of 2,000–ahead of even the most bullish brokerage house projections (mine, too).

To my mind, the key factor in the August advance is that just about everything went up.  Sectorally, the S&P performed as follows:

Healthcare          +4.7%

Staples          +4.6%

Utilities          +45%

Consumer discretionary          +4.3%

Financials          +4.0%

Industrials          +3.9%

S&P 500          +3.8%

IT          +3.7%

Materials          +3.6%

Energy          +1.8%

Telecom          -1.1%.

Every sector, save Energy and Telecom, was at least within striking distance of the index performance.  Only Energy and Telecom, each with its own internal issues, lagged.  Scarcely a market that seems spooked by either geopolitical worries or by concerns that interest rates are on the cusp of rising significantly.

To the contrary, Wall Street seems to be taking a bullish tack on both fronts.  It’s arguing that growth is exceedingly scarce in the EU and that Ukraine-related trade embargoes aren’t making the situation any better.  Therefore, nominal growth in the EU is going to be close to zero for the foreseeable future.  This implies that monetary policy in the EU may well soon be significantly looser than it is now.

In comparison, the US appears to be in robust health.  Its stocks, bonds and currency all have better prospects.

The wreckage of Abenomics in Japan and the continuing anti-corruption campaign in China suggest that Asians share the same positive view of the US.

So, the argument goes, no matter how gloomy Americans are about their economic situation, the US will continue to receive safe-haven inflows that will cushion the potential negative effects of eventual monetary tightening.

Personally, I’m not convinced.

Financial markets–particularly bond markets–have played out far more favorably than I, or most others, would have anticipated.  There’s a tendency when this happens to assume that the market is 100% correct, and to look for–and embrace–any explanation that makes sense out of recent market action.    I think that’s what is happening now.

At some point, however, the fundamentals reassert themselves.

I think bonds are very pricey, but then, of course, I’m not a bond expert.  Stocks strike me as fairly valued, or just enough above that point for it to be hard to make a convincing case that equities will rally from here.  On the other hand, I expect economic growth next year, not recession.  This implies that the overall direction of stocks over the next year is up.

So, short-term cautious, longer-term bullish.

What am I doing?

For the moment, I’m looking for stocks that are trading at relatively low PE multiples with at least pedestrian growth in sectors like IT and Materials that should benefit from economic expansion.  In other words, I’m looking in a (for me, unusual) negative way.  I want stocks that give me some upside, but where multiples are unlikely to contract and where expectations aren’t particularly high.

I’m sure I’ll get over this in a month or two and begin looking for home runs again.  But for now–and for me, as an aggressive investor–I’m relatively defensive.

August 4, 2014

July was one of the few down months the S&P has experienced over the past year and a half.

I can imagine three possible reasons for this:  the normal two-steps-forward-one-step=backward rhythm of the stock market (which has rarely been evident recently); valuations had become temporarily stretched enough to give investors pause; or strong economic data  are causing Wall Street to begin to brace for an inevitable tightening of money policy in the US (more about this in tomorrow’s post).

For today, let’s just look at the return patterns by sector for the S&P 500 for July and year-to-date.

last month’s S&P 500 performance

During July, the S&P lost 1.5%.  The sectoral breakout of monthly returns was a follows:

Telecom          +2.6%

IT          +1.4%

Healthcare          -0.02%

Consumer discretionary          -1.4%

S&P 500          -1.5%

Financials          -1.6%

Materials          -2.0%

Energy          -3.3%

Staples          -3.5%

Industrials          -4.1%

Utilities          -6.9%.

What jump out to me are the two bookends.  IT, which is, after all, a sector that rises and falls with the business cycle, was the best performer for the month   …and one of two sectors in positive territory.  Utilities, on the other hand, a defensive and a sector being vigorously talked up as receiving strong retail investor inflows, was at the bottom of the pile.

Although the index was down for the month, the sectoral pattern is certainly not flashing any sign of investor fear that an economic slowdown is on the way.


Ytd, the S&P breaks out by sector as follows:

Healthcare          +9.7%

IT          +9.5%

Utilities          +8.4%

Energy          +7.9%

Materials          +5.3%

S&P 500          +4.5%

Telecom          +4.4%

Finance          +2.4%

Staples          +0.2%

Industrials          -1.3%

Consumer discretionary          -2.5%.

The two best performers, ytd, Healthcare and IT, are also at the head of the pack for July.

Two of the three worst, ytd, Staples and Industrials, lagged again in July.

Materials were consistently mediocre.

Utilities and, to a lesser extent, Energy, which had been leaders through June, ran into a brick wall in July.  Both sectors have, in my opinion, limited profit growth potential.  Both had been laggards in 2013, so some catch-up was to be expected.  Neither is a favorite of mine, mostly because both require specialized knowledge and I’m not willing to put in the time.  This means my opinion on either isn’t worth much, but my take is that savvier people than me think that both have fully caught up.

Consumer discretionary and Finance may be showing some signs of life, although personally I’d like to see more evidence.

All in all, July seems to me to only be saying that Wall Street thinks the S&P has got a little ahead of itself and that some sectoral fine-tuning to portfolios is needed on valuation grounds.

We’ll know more as August unfolds.

July 1, 2014

a solid month to end a good first half

The S&P 500 gained 1.9% in June, completing a quarter in which the index rose by 4.7%.  Year-to-date, the S&P is up by 6.1% on a capital changes basis.  Toss in another 1%+ to get a total return.

Apparently, although I no longer keep good track of this, professional investors of all stripes have underperformed the index badly over the past six months.   Trailing the index by a lot has been the norm for hedge funds, whose general value orientation served them well during 2000-02–but not since.  So their underperformance isn’t news.  However, long-only managers also did more poorly than usual.

This is despite the fact that smaller-capitalization stocks, the preferred habitat of professionals, outperformed their larger brethren over the period.  The media assert that the underperformance stems from the lack of stock price volatility during the half.  While this may be true in the case of hedgies, short-term trading is seriously frowned upon by the clients of long-only managers, so I don’t buy this explanation.

My guess is that industry positioning is the culprit, since the best sectors during the first half were Utilities and Energy, both relatively unexciting areas that draw little professional interest.  At the same, time, the clunkers were Consumer Discretionary and Financials, everyone’s favorite overweights.

The overall sector returns for the first half are as follows:

Utilities          +16.4%

Energy          +11.7%

Healthcare          +9.7%

IT          +8.0%

Materials          +7.5%

S&P 500          +6.1%

Staples          +3.8%

Industrials          +2.9%

Telecom          +1.8%

Financials          +1.3$

Consumer discretionary          -0.1%.

For the month of June, the winners are the same, the losers different:

Energy          +4.9%

Utilities          +4.2%

IT          +2.3%

Healthcare          +2.1%

S&P 500          +1.9%

Consumer discretionary          +1.8%

Materials          +1.5%

Financials          +1.4%

Industrials          +1.0%

Staples          -0.5%

Telecom          -1.3%.

For some time–I wrote about this in my Strategy posts late last year–I’ve thought that the central fact about 2014 for investors would be its transitional nature.  The reversal of recession-induced PE compression happened in 2013.  Monetary tightening, meaning higher interest rates, stands in front of us.  Earnings growth looked to be only so-so.  Therefore, I thought, in December 2014 having achieved a 10% return would look awfully good.

The S&P took this idea to heart in the first half.  The best performing sectors were relative laggards sporting higher than average dividend yields.  Most active managers, however, appear to have stuck either with financials (whose attractions I don’t get at all) or the consumer names that have led the market since 2009.  Whoops.

Adding a little color to the proceedings, 2Q14 saw a wicked selloff in both last year’s winners and in smaller secular growth “story” stocks, which certainly didn’t help growth managers out.

looking forward

For some weeks I’ve been writing that I thought the 2Q14 “story” selloff had run its course and that it was time to pick through the badly battered.  Some of these stocks have risen by 20% or more since.  But few have recovered  anything close to the ground they’ve lost.  So I think there are still opportunities.

I still think the second half of 2014 will continue to be a period of transition.  Returns won’t be eye-popping.  A 3% dividend yield will be something to be prized.  In fact, if my idea that a 10% return would be a good outcome is correct–and I see no reason to change my mind–then the S&P won’t be much more than flat over the next six months.

Personally, I’m not going to position myself sectorally for this outcome.  I don’t want to close the door to the possibility of better results by being too defensive (part of this is me, part is the hunch that Utilities and Energy have done most of the work they’re going to do this year).  Instead, I’m going to continue to look for dividend yield and relatively visible earnings growth in more aggressive sectors, and and in a pinch of smaller, riskier stocks.

June 2 2014

deep in the plus column

Year-to-date, the S&P 500 is up by 4.1%.  2.1%, or just over half, of that amount was chalked up by the index in May.

The sectoral breakout of that return is relatively aggressive, and is as follows:

IT          +3.5%

Telecom          +3.4%

Materials          +2.8%

Consumer Discretionary          +2.7%

Healthcare           +2.5%

S&P 500          +2.1%

Staples          +1.8%

Industrials          +1.7%

Financials          +1.2%

Energy          +1.1%

Utilities          -1.7%.

Other than that generally upmarket sectors outperformed and defensive ones didn’t, there are a couple of points to be made:

–except for IT and Telecom on the plus side, and Utilities on the minus, the sectors are all clustered right around the index.  So the signals being sent by this month’s sectoral order are relatively mild.  The main message is the strength of the overall market.

–I like IT as a sector and I pay a lot of attention to it.  The sector is important because, although we (or at least I do) tend to picture corporate capital spending as being on building factories and populating them with big machines, the majority of business investment among US corporations is on IT.  While Materials and Industrials can tell us how the world is doing, IT lets us know about the US in particular.  May saw the best IT relative performance in a while.  Yes, it’s only one month, but still…

To my mind, stock market trading over the summer is most likely to end up being more of the mildly uptrending drifting that we’ve been seeing so far this year.

In a truly healthy market, however, sometime in the next month or two the market’s mind would be turning to the possibilities for earnings gains in 2015.  This resetting of the market’s discounting function typically causes performance to be better than one might expect based on consensus views of S&P profits during the current year.

Will that happen this year?  I have no strong views.  But, paradoxically, I think further market strength during the summer would be a bullish sign–not a reason to view the market as being temporarily overvalued (with the implication that a correction will follow).

May 2, 2014

a positive month

The S&P 500 eked out a small gain of 0.6% in April.  For the index as a whole, the pattern was similar to its performance in March–an advance, followed by a mid-month swoon and a late month recovery.  Year to date, the index is up by 1.9%.  Sectoral performance for April is as follows:

Energy          +4.8%

Utilities          +4.3%

Staples          +2.7%

Industrials          +1.5%

Materials          +0.7%

S&P 500          +0.6%

Telecom          +0.4%

IT          +0.2%

Healthcare          -0.6%

Consumer discretionary          -1.3%

Financials          -1.6%.

Year to date, the sectors fall out in this order:

Utilities          +14.0%

Healthcare          +4.9%

Energy          +4.9%

Staples          +2.4%

Materials          +2.4%

IT          +2.1%

S&P 500          +1.9%

Industrials          +0.8%

Financials          +0.5%

Telecom          +0.1%

Consumer discretionary          -4.2%.

What to make of these results?

Let’s toss out Energy, whose gains come entirely in April and are probably the result of investor fears about possible energy shortages if the situation in Ukraine turns further south.

Ex Energy, the sectors that have done well so far this year are the defensives.  I think this is because investors are (rightly) concerned that:

–stocks aren’t particularly cheap–not overvalued, but not cheap

–world economies aren’t growing particularly vigorously

–last year was an immensely profitable one for almost anyone owning stocks, meaning some payback is in order, and

–the Fed has taken the first baby steps toward removing the emergency monetary stimulus it has been pumping into the US economy for the past six years.

We might also observe that last year’s leaders are this year’s laggards, and vice versa.  I do think the valuation case has made it easier for investors to shift into a lower gear.  But my sense is that the economic/monetary situation–not valuation–is the driving force behind the portfolio reshuffling we have been seeing.

what to do?

My guess is that we’ll see more of the same for a while.  “Normal” market psychology–which I think is operative in the US today for the first time since 2007–would dictate that the first chance for a market hift back into more aggressive stocks will come when Wall Street turns toward earnings prospects for 2015.  That usually happens sometime during  the summer.

story stocks

Neither the sectoral figures nor the overall S&P 500 numbers adequately reflect the devastation that has been taking place among story/concept-rich, current earnings-poor smaller, more speculative stocks.  In most of these cases, the company situation hasn’t changed much since their high-flying days of 2013 and early 2014.  What has, however, is the market’s attitude toward risk.

Part of this may be the idea that rising interest rates diminish the present value of earnings far in the future.  Even if so, I see something more like the shift from naked greed, with few fundamental underpinnings, to all-out panic, again without much thought behind it.  It may also be that there’s a tailwind of investor redemptions or of margin calls fanning the flames.

Many such stocks have lost a quarter of their market values from their February-March highs.  Some have come closer to being cut in half.  These issues are not for everyone, but at some point less risk averse souls will begin to sift through the rubble.  I’ve already started.

Broadly speaking, though, I continue to believe that 2014 will be a more or less sideways year.  A 10% return will, I think, be enough to beat the market handily.  Hence the attraction of mature companies with modest growth prospects and, say, 3% dividend yields.  I think we need to think about how and when the present situation will change.  But that’s what prudent investors are doing all the time.  The trigger I see is when market attention begins to shift to 2015.  In my opinion, we’re months away from that happening, though.

April 2014

The dog ate my analysis fo the S&P 500 during March.

March 3, 2014

The s&P 500 returned to its winning ways in February, establishing a new all-time closing high of 1858 on the last day of the month (the previous closing high had been 1848, achieved on the final trading day of 2013).  Just before noon on the 28th, the index made an intraday high of 1868.  Heady stuff.

The breakout of the index returns by sector is as follows:

Materials          +6.7%

Consumer discretionary          +6.1%

Healthcare          +6.0%

Energy          +4.6%

IT          +4.3%

S&P 500          +4.3%

Industrials         +3.5%

Staples          +3.5%

Financials          +2.9%

Utilities          +2.8%

Telecom          -1.0%.

The sectors can be grouped into three clusters:  three strong outperformers, four clustered around the index, and three weak sectors.

The winners column is, as you might expect, dominated by the areas most sensitive to rising economic activity.  The losers are the defensives.  Two exceptions–Healthcare on the plus side and Financials on the minus.

I’m not sure what to say about either anomaly.  The primary thing is no doubt that a month is a short period of time and that it’s dangerous to generalize from so short a period.  Still, they’re something to keep in mind.

My Healthcare exposure is through mutual funds, including the Prudential Jennison Health Sciences fund, run by a brilliant former colleague, David Chan.  I’ve never been a fan of financials, other than in emerging markets.  It might be that investors are starting to work out that the banks have been more heavily reliant than they thought on bond trading profits–which will be hard to come by, I think, over the next few years.

What I think is the most significant about February is that, after several unsuccessful attempts, the S&P has broken through the old high.  True, not by a lot.  But if the index can stay above 1848 for the next couple of weeks, chances increase of the old high becoming a new floor for further advance.

Although I don’t have any hard figures, my impression is that during February investors focused strongly on the idea that Millennials = good, Baby Boomers = bad.  I think this will be an increasingly important market theme–assuming that worldwide economic growth continues to strengthen.  The most useful thing for us to do if the market moves sideways for a while (which I think is the most likely scenario) is to rebalance active holdings in favor of this theme.

February 3, 2014

For the first time late last summer, the S&P 500 has had a down month.

In itself, this isn’t so surprising. What is much more noteworthy is that the index strung together without a hint of weakness such a strong series of up months through December.

January is a month where weird stuff happens in the stock market.  As a result, price action is typically hard to read. For one thing, taxable investors who have delayed taking profits for tax reasons sell past winners they no longer wish to hold. For another, the prior year’s clunkers rebound as December’s tax-selling pressure on losers abates.  This year, institutional equity managers may also have chosen ( so as to maximize their bonuses, of course) to delay portfolio reorientation until January.

My overall take is to acknowledge, but then ignore, all these confusing factors.  I think we’re simply in the middle of a garden-variety correction.  That’s the down part of the two-steps-forward, one-step–back dance stock markets normally perform.  For what it’s worth, my guess for potential stopping points for selling are 1750 and 1700 on the S&P 500.

One caveat in my “garden variety” characterization. It concerns the bond market.

The Fed’s continuing demonstration of its intention to systematically reduce the amount of emergency extra money it pumps into the economy has begun to send shivers down the spines of bond investors who have been speculating in dicey securities, playing the “greater fool” theory and s-t-r-e-t-c-h-i-n-g for yield (think:  contingent convertibles in Europe, payment-in-kind junk bonds everywhere, and sovereign debt of the Fragile Five (Argentina, Indonesia, Turkey, Brazil and South Africa).  I think such imprudent buying just adds to the woes of the bond market. “Gee, too bad,” I think.  The big question for us as equity investors is whether there’s any negative spillover onto stocks.  We’ll just have to see.

One possibly positive note:  the Seattle Seahawks won the Super Bowl last night.  According to the Super Bowl indicator (a spoof of crazy correlations and of technical analysis in general, which has turned out to be amazingly accurate) this portends an up year for stocks.  [By the way, in case you’re interested, Punxsutawney Phil has predicted six more weeks of winter].

Looking at the sectoral breakout of the S&P 500 for January, everything ex Utilities and Healthcare sold off heavily.  The returns are as follows:

Utilities          +2.9%

Healthcare          +0.9%

IT          -2.6%

S&P 500          -3.6%

Finance          -3.7%

Telecom          -4.2%

Industrials          -4.5%

Materials          -4.7%

Staples          -5.3%

Consumer discretionary          -6.0%

Energy          -6.3%.

Patterns?  I don’t see much.  Most sectors are grouped around -4%.  Two defensive sectors, Utilities and Healthcare, join one very cyclical sector, IT, as winners.  Defensives like Telecom and Staples were losers.  Some of last year’s winners fall below the S&P return and some of last year’s losers stay above it–which is understandable.  But the opposite is the case, also.  Witness Healthcare and Telecom.

Two things to do in times like this:

— continue to observe, and

–look to toss overboard losers in your portfolio that are outperforming, while reeling in stock you’ve wanted to buy but felt were too expensive.

January 2, 2014

Welcome to 2014!

Wall Street is–and should be, at least according to those who haven’t felt the rough edge of its Darwinism–a “What have you done for me lately?” kind of business.

It’s the future that counts, not the past.  2013 is already in the books, so it’s done and gone.  The important thing is to figure out how to make money in 2014.

Still, let’s take one last glance back to see the patterns that prevailed in the S&P 500 last year, and in the closing month of the year, as well.

One other caveat:  both December and January are typically distorted by the effects of tax-related selling by individual investors and taxable corporates like insurance companies.  I haven’t detected much in December, although I didn’t expect much.  January may be different, since five years of a rising trend in stocks suggests that portfolios must have some gains that individuals have nursed into January to be taken in the new year.

To the S&P 500 in December, then.

Another up month,  sporting a gain of 2.4%.  The sectoral breakout, based on capital changes (i.e., dividends excluded) is as follows:

Materials          +4.6%

IT          +4.1%

Industrials          +4.0%

Energy          +3.0%

S&P 500          +2.4%

Consumer discretionary          +2.1%

Financials          +2.0%

Healthcare          +0.7%

Utilities          +.5%

Staples          +0.2%

Telecom          -.3%.

What jumps out at me:  IT outperforms again; weakness in the stars of 2013 (ex Industrials), which is the only year-end the tax-selling effect I can see; strength in Materials and Energy, which do their best in an accelerating world economy.

Compare the December pattern with that of full-year 2013 sector results, namely:

Consumer discretionary          +41.0%

Healthcare          +38.7%

Industrials          +37.6%

Financials          +33.2%

S&P 500          +29.6%

IT          +26.9%

Materials          +22.7%

Staples          +22.7%

Energy          +22.3%

Utilities          +8.9%

Telecom          +6.5%.

The ticket to success last year, in brief, was to overweight at least one of the outperforming four sectors and to avoid Utilities and Telecom.  Will that change in 2014?

At some point, yes.  But although I find dividend-orient stocks conceptually appealing (poor recent performance + my view that 2014 capital changes won’t be eye-popping) there’s no sign of life in them, or other defensive areas, so far.

Another thing that catches my eye:  no selling in Industrials in December, even though that sector was very close to the top for 2013.

my bottom line:  despite the prevalent view on Wall Street (with which I concur) that the S&P will fall short of a double-digit positive return in 2104, the market seems to be retaining its aggressive posture.  If anything, the betting seems to be that GDP will accelerate and that capital spending areas like Industrials, IT and Materials will be this year’s winners.

I’m not moving my portfolio away from its Consumer discretionary and IT emphasis  …not yet, at any rate.  But , as always, I’ve got to respect what current price changes are saying.

December 3, 2013

How wonderfully monotonous!!!   …or perhaps monotonously wonderful!!!  Another up month in November.

There’s a clearer message in the November returns than in October’s.  The sectoral breakout of the S&P 500’s +2.8% gain for the month (capital changes only) is as follows:

Healthcare          +4.5%

Financials          +4.4%

IT          +3.6%

Consumer discretionary          +3.3%

Industrials          +3.3%

S&P 500          +2.8%

Staples          +1.4%

Materials          +1.1%

Energy          +0.1%

Utilities          -2.3%

Telecom          -2.6%.

As it turns out, November was a microcosm of the past year as a whole.  Compare the November return pattern with that of the past twelve months, namely:

Consumer discretionary          +38.4%

Healthcare          +37.3%

Financials          +36.5%

Industrials          +35.3%

S&P 500          +27.5%

IT          +21.1%

Materials          +20.8%

Energy          +19.3

Staples          +19.3%

Utilities          +7.9%

Telecom          +5.7%.

The one interesting note for diehard techophiles like myself is that IT made a rare appearance in the winners’ column last month.  Otherwise, it’s same-old, same-old.  Dividend-oriented sectors continued their underperforming ways, as did Materials and Energy, two sectors that perform best when global GDP is roaring ahead.

The point of the twelve-month figures is to point out that the current pattern may be getting a bit long in the tooth.  After all, the outperformance of the winning sectors has been mammoth over the past year.  Underperformance has been even more so.  The spate of mailing I’ve received this year touting proprietary dividend-maximizing strategies didn’t cause the relative meltdown of income-oriented areas like Utilities, Staples and Telecom.  It merely foretold it, in the odd way that Wall Street marketing organizations have of only gathering the courage to tout a trend when it has been in place for a considerable time and is almost completely played out.

The real issue for us as investors is whether equity markets are getting ready for the next turn of the wheel.  My sense is that it is, but that December will mostly be spent in celebration over a banner year and in prayer that the boat not be rocked until January.  So there’s plenty of time to examine the junk mail runes cast by our postman, Darvin, to identify what not to buy in 2014.  I also suspect that the last couple of weeks of this month will be unusually illiquid, even for December.  Big investment companies will see no need to take any risks this month.

By lack of liquidity I mean it will be hard to move a million shares of even a large-cap name in a nanosecond.  Tough for computer-driven hedge funds, but not for individuals.  For us, however, it may be well to make up a short to-do list of buys and sells to watch during the final trading day or two of 2013, on the off chance some last-minute (read: either desperate or a potential manipulator) traders appear and move prices up or down by, say, 10%.

Hopefully, I’ll begin publishing my Strategy for 2014 early next week.

November 1, 2013

We had tons of trick-or-treaters yesterday–so many, in fact, that I had to make an emergency candy run.  I had to go to three stores before I found one with Halloween candy left.  I wonder what that means.

Anyway, another up month for the S&P.  This time by 4.5% on a capital changes basis.  Look at the sectoral distribution of returns, though.  Here it is:

Telecom          +7.4%

Staples          +6.1%

Industrials          +5.1%

Consumer discretionary          +4.6%

IT          +4.5%

S&P          +4.5%

Healthcare          +4.2%

Materials          +4.1%

Energy          +4.1%

Utilities          +3.7%

Financials          +3.2%.

To me, what’s striking about this month is the lack of information in the sectoral breakout of returns.  Look how tightly most sectors are grouped around in index.  Telecom, a serial underperformer, finally decided to go up.  Financials did poorly, maybe because the SEC finally has a head who’s willing to enforce the securities laws (it may also be J P Morgan’s bad luck to have been so far down the list of malefactors that sweetheart plea deals were no longer being given out).

Otherwise, though, October was all about the asset class of equities and about individual stock reaction to reported earnings–GOOG up 17%, AMZN up 16%, for example–rather than sectoral shifts.

The one note that disturbs me is that one of the big “plusses” driving stocks higher is the idea that Washington dysfunction is damaging the economy to such a great degree that the Fed still fears to slow even the rate at which it adds extra emergency stimulus, even though we’re closing in on the beginning of year six of this extraordinary behavior.  In fact, the Treasury is beginning to disparage Germany for running a healthy economy and not doing the same thing we are–a worrying parallel with the summer of 1987.

Where to from here?

I think the stock market is beginning to flatten out and to “back and fill.”  More about this on Monday.

October 1, 2015

Day 1 of the government shutdown   …but that’s not our topic of the day.  Here, we’re all about September S&P 500 performance.

September was a pleasant surprise to me.  I had been imagining that, given the relatively strong performance of the index, year to date, that we might drift for a while.   But, no.  On a capital changes basis, the S&P gained 3.6% for the month.

a one-month view

Here’s how the sectors break out:

Industrials          +6.1%

Consumer discretionary          +5.8%

Materials          +4.6%

S&P 500          +3.6%

IT          +3.4%

Financials          +3.4%

Healthcare          +3.3%

Energy          +2.5%

Staples          +2.0%

Utilities          +0.9%

Telecom          -0.04%

Sectors look like they’re clumped into three groups:

–stocks investors really wanted to own more of, namely Industrials, Consumer discretionary and Materials,

–stocks no one wanted, to wit, Energy, Staples, Utilities and Telecom, and

–the rest, which pretty much mirrored the index.

It’s no surprise that defensives have remained out of favor.  Except for the wireless telecoms, these groups’ main attractions have been their dividend yields, and that party is over.

On the other hand, investor interest in Industrials and Materials says Wall Street is increasingly buying into the idea that world economies–notably the EU and China–have passed their cyclical lows and are on the way up again.

three months

Look at the three-month returns.  They tell a similar story, although with a somewhat louder voice:

Materials          +10.1%

Industrials          +9.0%

Consumer discretionary          +7.9%

IT          +6.7%

Healthcare          +6.6%

Energy          +5.4%

S&P 500          +5.3%

Finance          +3.2%

Staples          +1.2%

Telecom    (Ugh!)      -4.9%

Utilities (Ouch!!)          -6.9%

The main difference I see is that IT, another economically sensitive sector, is a three-month winner.  The relative underperformance of Staples et al over the summer is pretty brutal, as well.

where to from here

The economic data from the EU and from China continue to be good.  The three-month S&P numbers are convincing me that I probably should begin to branch out from the old reliable Consumer Discretionary and shop around for one or two industrial names.

Why is the market continuing to go up, despite hefty gains so far this year?  It’s not current earnings, which have been about as expected.  Rather, I suspect that it’s because–contrary to its untra-defensive stance of the past several years–the market is returning to a more normal pattern of discounting future earnings.  That is to say, aournd July it began to factor into today’s prices anticipated profit gains for 2014.

There is one obvious fly in the ointment–the government shutdown that has just begun.  It’s not so much the shutdown itself.  After all, we could just rotate our portfolios toward foreign earners in the US and toward European and Pacific stock markets.  The question is whether this is only the opening act in a show whose main event will revolve around the US possibly defaulting on its sovereign debt.  That wouldn’t be good.

For me, it’s just too soon to tell what the political outcome will be.  I’m currently thinking that either there won’t be a default or that, if there is, the immediate negative effects won’t be draconian.  This stance implies being a buyer on weakness of economically sensitive names of the kind that have done well over the summer.  But I’m always an optimist.  And it remains to be seen whether I’ll have the courage of my (lukewarm) convictions as/when weakness arrives.  The more prudent course would be to wait and watch.

September 3, 2013

Up, down, up, down.

That’s the last four months for the S&P 500.  To my mind, that’s what we have to look forward to with stocks for a while.

Don’t ask me how long a “while” is, though.

The global macroeconomic picture is relatively clear, and relatively good:  the US continues to strengthen, the EU is beginning to turn up, China is, as well.  At this point, it seems a pretty good bet that 2014 corporate profits will be better than results for 2013–and probably better than the S&P is giving credit for in today’s prices.

On the other hand, the S&P is up 14.5% this year through August, on a capital changes basis. Make that 16.%+ with dividends.  …which is a lot.

To put things into perspective:  over very long periods of time, stock markets have tended to produce 6% real annual returns. Figuring current inflation at 2%,  that translates into a generic expected return for the S&P of about 8%.

So there’s a psychological tug of war going on between “the future is bright” and “stocks have gone up a lot.”  At some point, the former will overcome the latter, I think.  The question is when.  My guess is that the US has to get past the debt ceiling debate first.

returns by sector

Looking at the S&P for August, sectoral returns–none of them is plus territory–are as follows:

Materials          -0.2%

IT          -0.8%

Energy          -2.1%

Industrials          -2.8%

Consumer discretionary          -3.0%

S&P 500          -3.1%

Healthcare           -3.6%

Telecom          -4.1%

Staples          -4.5%

Financials          -5.2%

Utilities          -5.5%.


There are two that I can see:

–Defensives–Utilities, Staples, Telecom–got killed.  That’s odd for a down month.  Maybe it’s a bit of throwing in the towel on stocks whose main attraction is dividend yield.

–The  top three relative winners were the year-to-date turkeys.  The fact that they haven’t had any upside in the recent past is giving them what might strike you as a weird sort of downside protection.  But, although it may seem counter-intuitive, its not uncommon.

where to from here

I don’t think last month’s performance patterns have much macroeconomic significance.  I think it’s mostly been about evening out relative valuations, with a hint of panic on high dividend-yielders thrown in.

Beneath the surface, however, I think two major changes are starting to take place:

–I think the yield-for-yield’s-sake theme that’s been going on for about four years is coming to an end.  I think many high-yielding stocks will remain attractive, but they’ve got to have an observable earnings growth pulse as well.

–For the past two years, the market’s focus has been on companies that have most of their earnings coming from the US.  Special focus has been away from firms that cater to the affluent and toward ones patronized by middle-class Americans.  I think there’s still a lot left to go with this theme.  At the same time, however, middle-income US consumer plays are no longer alone on center stage.  Firms that cater to millennials and those that have significant EU or Pacific Basin businesses are beginning to demand some of the limelight.

August 2, 2013

Another month, another gain for the S&P 500.  A 5.4% advance for the index last month brought its year-to-date total gain (on a capital changes basis) to +18.6%.  The sector breakdown of S&P 500 results is as follows:

Healthcare          +7.1%

Industrials          +5.7%

S&P 500          +5.4%

Finance          +5.3%

Materials          +5.3%

Consumer discretionary            +5.2%

Energy          +5.1%

Utilities          +4.2%

IT          +4.1%

Staples         +3.9%

Telecom          -0.7%.

Healthcare was the clear standout during July.  The bulk of the index, ex the IT sector, performed about in line with the benchmark.  Sectors whose main attraction is above-average dividend yields–Utilities, Staples and Telecom–were laggards.

To my mind, the main theme of the month was the across-the-board rise of the index.  Sectoral differences were less important than the shift in relative asset class value between stocks and bonds.

How can the index have gone up so far while eight of ten sectors under performed?  It’s partly due to the fact that most under performing sectors were nevertheless fairly close to the index.  Also, Telecom and Utilities are both tiny in market size, together making up a bit less than 6% of the total capitalization of the index.

IT is the one outlier.  AAPL, which makes up 10% of the IT sector’s capitalization by itself, rose by more than 9% during the month–adding about .5% to the overall performance of a sector otherwise being hit hard by the current slump in consumer demand for technology devices.

So far, so good for the idea that stocks go sideways to up while bonds gradually decline in price.   Not so good last month for the idea that Consumer Discretionary would outperform.  I’m sticking with CS, though.  I continue think the stock market will go sideways to up.  And I expect the biggest winners to be firms that cater to the needs of middle- and below middle-class people whose economic fortunes are gradually improving as economic recovery slowly spreads.

July 1, 2013

economic recovery continues

Last Friday closed the books on the best first half for stocks in the past 14 years, up 12.4% on a capital changes basis.  Toss in another percent or so for dividend payouts.

That feat is a footnote to current market action, however, not a headline.  The big story of the day is that the Fed thinks the US economy is in good enough shape after four years in the monetary policy emergency room to be taken out of intensive care and put on track to eventually leave the hospital.  The latter outcome is still a couple of years down the road.

not great news for bonds

Wall Street didn’t take this news well in May, and it continued to react poorly in June.  Bond yields continued their sharp rise, prompting a Fed comparison of bond traders to the feral pigs that infest much of rural Texas.  (The 10-year Treasury yielded 2.16% at the end of May and 2.48% last Friday;  the 30-year figures are 3.30% and 3.50%.)

Stocks had a number of rough days, too, before seemingly recovering their equilibrium close to month-end.  The equity bottom line:  the S&P lost 1.5% for the month.

S&P returns

The sectoral composition of returns is as follows:

Telecom          +1.9%

Consumer discretionary          +0.8%       +

Utilities          +0.6%

Staples          -0.6%

Healthcare          -o.9%

Industrials          -1.5%

S&P 500          -1.5%

Finance          _1.8%

Energy          -2.1%

IT          -3.7%          +

(IT, ex AAPL          ≈-2.7%)

Materials          -4.5%.

winners and losers

Sorting out the winners and losers in June,

–Consumer discretionary continues to be a winner.

–Materials continues its long string of underperformance.

–Defensives, the more bond-like stocks, bounced back after poor performance in May.

–Financials and IT are last-month winners, this-month losers.

Overall, the market took on a more traditional defensive cast in June.

Where to from here?

A recent public relations full court press by the Fed seems to have stemmed incipient bond market panic, at least for the moment.  The Fed’s talking points have been that we’re still months away from the beginning of the process or rate normalization, and that the journey will take years.  Nevertheless, bond funds are experiencing withdrawals–something I think will continue–and equity managers are receiving inflows.

I still think the most likely outcome is that bonds gradually decline, but stocks go sideways to up.

Switching from an overweight in Telecom to one in IT a month ago was certainly a dumb thing to have done.  This month, I’m going to go solely with an overweight in Consumer discretionary.

From an strategy point of view, the idea I feel most comfortable with is to that economic recovery in the US reaching more and more average Americans.  Find consumer firms that serve the mass market.

June 3, 2013

rising interest rates

May appears to me to mark a substantial shift in attitude by financial markets toward the future course of interest rates.  Markets have decided that there’s no longer any percentage in wagering that rates will stay where they are or decline.  The new bet is that, sooner or later, they’re going to rise.  No one knows exactly when.  But that’s not important.  The key idea is that there’s no longer any money to be made by betting they won’t.

If there’s a single decisive factor in this change of tone, I think it’s that the sequester isn’t creating the economic train wreck the Obama administration predicted a few months ago.  But there has also been a steady stream of hints from the Fed that the current emergency-low interest rate environment won’t last forever. Economic data have been reasonably strong.  The stock market has been steadily advancing.  House prices are up. And consumer confidence is rising.

The movement of Treasury bond yields during May has been noticeable.  The 10-year yielded 1.70% on April 30th.  It yielded 2.16% last Friday.  The comparable 30-year yields are 2.88% and 3.30%.  …and the process of normalizing rates has just started.

S&P 500 up in May

The S&P 500 index rose by 2.1% in May, despite the rise in rates.  But there has been a very sharp change in tone within the stock market, best seen through changes in the performance of different market sectors.

Here’s the sectoral breakdown of S&P performance for 2013 through April (the order is correct; the year-to-date percentage changes are approximate):

Healthcare           +19.5%

Utilities               +18.0%

Staples          +17.5%

Consumer discretionary          +16.5%

Telecom          +16.0%

Financials          +15.5%

Energy          +14.5%

S&P 500          +12.0%

Industrials          +10.0%

IT          +6.0%

Materials          +5.5%.

Compare this lineup with May performance:

Financials          +6.1%

Industrials          +4.9%

IT          +4.6%

Consumer discretionary          +2.8%     +

Energy          +2.5%

S&P 500          +2.1%

Materials          +1.9%

Staples          -2.0%

Telecom          -7.4%     +

Utilities          -9.1%.

Let’s sort the sectors into four piles:

1.  winner to loser:

Utilities, Telecom, Staples, Healthcare   –all the defensive groups, the worst performing being the most bond-like

2.  loser to winner:

Financials (steepening yield curve = higher profits), Industrials, IT    –economically sensitive groups, beneficiaries of a strengthening world economy

3.  winner to winner

Consumer Discretionary, Energy

4.  loser to loser

Materials   …chronic oversupply induced by new capacity added?.

where to from here?

I think the continuing new “look” to the market is what we saw in May.  The overall sense of May performance is that global economies will continue to expand at a moderate rate.  Growth won’t be good enough to produce sharp increases in the price of industrial raw materials, but it will be good enough to support investment in IT and industrial machinery.  At the same time, areas where the main attraction is the dividend yield will continue to lose their allure.

I tend to believe that the selloff in Telecom will reverse itself at some point, since wireless is a growth story for large constituents of this group.  But I have no idea when this reversal may come.

I’m a little surprised that Telecom and, to a lesser extent, Utilities declined so severely.  The thinking here is probably that the first sale is probably the best.  That’s also probably right.

My overweight in Telecom produced the first loss relative to the index for my model portfolio in a long while.  For June, I’m going to eliminate my overweight in Telecom and replace it with an overweight in IT.

May 1, 2013

Happy May Day!!

April was the latest in a lengthening series of uptrending months for the stock market.  The S&P 500 added 1.8% for the month, ending in a new all-time high for the index at 1597.57.  That’s a 12.0% gain, year-to-date, to which one must add another 0.7% in dividend payments.

Sailing during April was by no means smooth, however.

The index plunged by almost a percent in the twinkling of an eye on Tuesday the 23rd, when someone hacked into the Associated Press Twitter account and sent a false tweet asserting President Obama had been injured in a White House bombing.  Computers read the message and reacted instantly by issuing large sell orders.  The market quickly reversed itself as humans figured out the tweet was a fake and unplugged their machines.

Also, commodities, especially gold, sold off in a way that temporarily rocked the financial markets and had me contemplating running for cover.  The accompanying negative technical noise quickly abated, however–although not as quickly as in the case of the AP Twitter scare.

the S&P by sector

Sectorwise, the index performed as follows during the month (my overweights marked by +):

Telecom          +6.0%         +

Utilities          +5.9%

Consumer Discretionary          +2.9%          +

Staples          +2.9%

Healthcare          +2.8%

Financials          +2.7%

S&P 500          +1.8%

IT           +0.8%

Materials          +.5%

Industrials          -0.8%

Energy          -0.9%.

I find myself in pretty much the same position today that I was a month ago.  On the one hand, stocks have already achieved all the gains–and then some–I thought they would for the year as a whole.  On the other, the tenor of daily trading suggests that the market still wants to go up.

In addition, in the past week or two investors seem to be increasingly rotating their buying toward beaten-down, economically sensitive stocks like CAT or INTC whose return to rising profits may be a 2014 phenomenon.  I take this as a bullish sign–that increasing confidence in the market is allowing buyers to begin to extend the earnings horizon they will consider in determining what to pay for a stock today.  I don’t see this discounting next year’s earnings in a cyclical stock today as speculative excess;  it’s more a return to normal from an extended period of Great Recession-induced fear.

What about “Sell in May and go away.”?  I don’t know.  Media commentators have acquired a fondness for this British aphorism–which, of course, is an argument that it won’t hold true this year.  Rather than worry about the possibility of a near-term correction, however, I think the better course is to trim positions that have grown too large and to reinvest the money in high quality economically sensitive stocks.

My overweights?   …I’m sticking with Consumer Discretionary and Telecom.  I’m tempted to add IT but won’t.    The attraction of IT?  For one thing, there’s the rotation toward cyclicals.  For another, AAPL seems to have answered to question that has, to my mind, driven its recent underperformance, namely,”Who doesn’t own AAPL already and is willing to buy the stock?”  The answer:  AAPL itself.  I think AAPL will exert  upward pressure on the IT sector.  Even though it’s the sector’s largest constituent, I’m not sure that’s enough.

April 1, 2013

The S&P 500 had another strong month in March, reaching a new record high in the process.  The index has recovered all the Great Recession-related losses incurred since the previous all-time high in 2007.

Some commentators, wanting to throw a little cold water on the achievement, have pointed out that last month’s new high is a nominal one only, that is, the index is calculated in dollars of the day and has not been adjusted for inflation.  A new real high would be maybe 5%-6% above the month-end close.

To my mind, this is purely pedantic point   …because index companies have paid out well over 10% of their market value in dividends over the past five years.

Taking a look at the index returns by sector, they fall out as follows for the past month (my overweights marked by +):

Healthcare          +6.2%

Utilities          +5.1%

Consumer discretionary          +4.8%     +

Staples          +4.5%

Financials          +3.7%

S&P 500          +3.6%  

Telecom          +3.2%          +

IT          +2.4%

Materials         +2.2%

Industrials          +2.1%

Energy          +1.9%.

A three-month view doesn’t look very different:

Healthcare          +15.2%

Staples          +13.7%

Utilities           +11.8%

Consumer discretionary          +11.8%

Financials          +10.9%

Industrials          +10.0%

S&P 500          +10.0%

Energy          +9.6%

Telecom          +8.2%

IT, ex AAPL          +5.7%

IT          +4.2%

Materials          +4.2%.

what jumps out to me

1. Healthcare.  The sector was an outperformer last year and continues to be one so far in 2013.  Contrast that with the 2012 showing of this year’s fellow defensive-group stars, Utilities and Staples, which were deeply at the bottom of the pile last year.  My first thoughts are that expectations are low and that most of the horrible stuff that could happen in the sector has already occurred and is behind it.

Utilities and Staples, in contrast, I see as being in the winner’s circle so far in 2013 mostly because they were so wretched in 2012.

2.  Are defensives leading the market?  Yes, even though this usually happens in a downtrending market (after all, they’re called defensives for a reason).  Contrary to past form, I don’t think this is happening because canny investors are thinking the market will soon begin to tumble down a cliff.  Instead, I see Wall Street as wanting to avoid sectors like Materials. IT and Energy, which normally do well when the world economy is roaring ahead.  The logical consequence of desiring to avoid sectors you think will be turkeys is overweighting what’s left.  Said a different way, I think market commentators who conclude from recent sectoral performance that the S&P is heading for serious trouble are wrong.

After five strong months in a row, some mild sideways-to-down movement for the S&P before it starts to head up again is certainly a possibility.  But recent performance patterns aren’t evidence in favor, in my view.

does this square with my 2013 Strategy view?

It does   …and it doesn’t.

So far, world economic performance and S&P earnings have both come in about as I’ve expected.

On the other hand, the S&P has already surpassed my price objective for full-year 2013.  In setting this target, I’d assumed that the market would be driven solely by earnings.  I thought–and still think–that this is a reasonable, though conservative, assumption to make.

It now appears, however, that investors are–at least for the moment–willing to pay a higher price for earnings than they have been willing to over the past couple of years.  This better mood may, or may not continue.  But I think it’s a mistake to bet that it won’t.

technical runes…

are ambiguous.  On the one hand, the resistance line of the 2007 high.  So there’s nothing but blue sky ahead.  On the other, the  S&P is now farther above its 200-day moving average than it has been since 2000.  Pick your poison, as they say.

my overweights

I’m continuing with Consumer discretionary and Telecom.  That worked in March.  Why not in April, too?

March 4, 2013

February was the month of maximum pre-sequester publicity. The two major parties filled the media with half-truths and exaggerations, aimed both at frightening the public and directing blame at their political opponents.

Nevertheless, the S&P 500 eked out a gain of 1.1% for the month despite the fact that the sequester did go into effect at month’s end.Business activity continued to slow during February. Most consumers appeared relatively unfazed, however.

the sequester

It’s important to put the sequester into context:

–The consensus view of economic forecasters is that the sequester could clip about 0.5% from GDP this year. It’s not yet clear, to me anyway, whether the administration’s principal tactic will be to try to soften the economic blow, or to score political points by making spending cutbacks as visible and disruptive as possible.  My guess is the latter.  This is just how politics works. The investment significance is that economists’ estimates not likely to be short of the mark.

–Of every $1 Washington spends, only $65 comes from taxes and other ordinary inflows.  The other $.35 is borrowed and runs up the already huge federal debt.  The sequester will clip a mere $.02 out of that dollar. Relatively speaking, it’s just a drop in the bucket. The heavy lifting of tax reform and spending reduction is yet to come. (Just as a reminder, of the Federal $1.00, $.25 goes to the military and about $.20 each to Social Security and Medicare/Medicaid. Balancing the budget without touching these would mean obliterating everything else.)

the S&P

While the sectoral breakout of returns of the S&P 500 didn’t show an aggressive cast during February, it wasn’t particularly defensive either. The returns are as follows:

Consumer discretionary +3.1%

Staples +3.1%

Telecom +2.6%

Industrials +2.1%

Utilities +1.6%

Financials +1.1%

Healthcare +1.1%

S&P 500 +1.1%

IT +.4%

Energy 0

Materials -1.7%.

Three aspects of February performance stand out to me:

–the market was up, despite continuing dysfunction in Washington

–year-to-date performance is defined more by what sectors have not done well, rather than those which have. Consumer discretionary, Healthcare, Staples and Industrials are at the top of the performance list. But two others have outperformed. Utilities and Telecom are slight laggards, but both remain within easy striking distance of the index. So far, however, IT and Materials are real clunkers—probably because the two are the most dependent on robust economic growth.

–there’s more to the IT story, though. An unsually large number of IT firms have reported 4Q12 earnings that exceeded market expectations. Despite this, IT stock performance has been weak. This is partly due to the continuing underperformance of AAPL, whose stock carries about a 10% weighting in the sector. APPL fell 13.9% in January and 3.4%in February. Even ex-AAPL, however, the sector doesn’t come anywhere near the 6.2% gain of the S&P since New Year’s Day.

What’s going on? I suspect it’s that the quantum leap in INTC microprocessor performance for ultrabooks and tablets that’s in the offing won’t be available on the shelves until the year-end holiday season. The same thing for the next iteration of the Xbox and Playstation. So there’s no reason for  consumers to buy now. And businesses, especially those with government contracts, remain cautious.

Where to from here?

I think we drift, with a gently upward bias.

I think the market has already discounted all of the earnings growth we are likely to see this year for the S&P 500. Normally, that would mean a correction–downward pressure on stock prices until investors could see the possibility of a 7%-10% gain.  But I think that downward pressure is being counteracted almost completely by bond investors who want to diversify away from fixed income and into stocks. Why not have done this when stocks were half today’s prices?  Don’t ask me. But better late than never, I guess. In any event, I don’t think this source of upward pressure is going to go away soon.

Sector overweights?

In today’s environment, I think it will be harder to make money through sector allocation than it has been for the past four years. Still, I’m going to give it a try by overweighting Consumer discretionary and Telecom.

February 1, 2013

The first month of 2013 is now in the books, and it’s been a very strong one for stock investors.  I’ve read, but haven’t verified, that this has been the best start of a year for the s&P 500 since 1994.

Continuing strength in the housing market, the rise of the euro (bolstering the chances that the quarter of the S&P’s profits that come from Europe will be good) and a budding rebound in the Chinese economy are the main reasons why, in my view.  The fact that Washington mitigated part of the “fiscal cliff” by canceling some scheduled tax increases–while kicking the can down the road on dealing with the federal debt–probably also lightened the mood.

In addition, there are continuing reports that individual investors, after cling for four years to their cash and their bonds, are showing renewed interest in stocks.  I’m not sure we should regard this as a major force moving stocks higher, but it certainly doesn’t hurt.

The breakout of the S&P returns (capital changes) on a sector basis is as follows:

Energy          +7.6%

Healthcare          +7.3%

Financials          +5.8%

Consumer discretionary          +5.6%

Staples          +5.6%

Industrials          +5.6%

S&P 500          +5.2%

Utilities          +4.7%

Materials          +3.8%

Telecom          +2.2%

IT          +1.3%.

Patterns?  Information?  It’s always dangerous to try to interpret January all by itself, because the month is always influenced by bounceback from tax-motivated selling of losers in December and by tax-selling of winners nursed into the new year.  Nevertheless, three things stick out to me:

1.  Energy was the biggest loser of 2012 (as you can see by scrolling down to last month’s commentary).  Although there are interesting new developments on the energy front, I’m not sure Energy’s first place showing is any more than a temporary bounceback from last year’s weak performance.

2.  Financials continue to show strength.  They’re not my cup of tea, but continuing improvement in the value of the mortgage loans they have on the books may keep them in the top half of sectors for a long while.

3.  IT came in dead last.  It’s a sector I like.  But even correcting for the negative affect of AAPL, which is the largest constituent of the sector, and which underperformed the S&P by about 20 percentage points during the month, would only push IT one notch higher in the rankings.  And that comes after a (mildly) sup-par outcome for 2012.  Time for a rethink on my part.

My model portfolio had its worst month ever, losing about 20 basis points to the index.  Having IT as a double overweight can do that to a person.  I’m going to take a month off, returning to a completely neutral position for February while I think things out. I continue to believe that the main themes for 2013 will be housing, China and the euro.  The question is how to translate that into sectoral allocation.

January 2 2013

Happy New Year!!!

a strange December

December is always a month that contains crosscurrents, all relating to the end of the calendar year.

Investors do year-end tax selling.  Professional portfolio managers, annual bonuses already nailed down–for good or ill–will be willing to make aggressive changes to their portfolio structures in preparation for the year to come.  Then, of course, almost everyone takes the final two weeks of the year off, allowing markets to bob up or down on low volume and making it subject to speculative influences.

The December just ended had two additional distorting factors:

–the impending rise in taxes on capital gains and dividends, which caused some corporations to make large special payouts during the month (these don’t appear to have affected the S&P total returns for 12/12–maybe they’re not in the data?); and

–investor worries that partisan infighting would cause Washington  to drive over the fiscal cliff,  triggering a domestic recession.  Memories of loony legislators who argued four years ago that our best course of action would be to allow the banking system to collapse did little to put these fears to rest.

This is not an airing of grievances.  Festivus has come and gone.  I want to point out that I think there’s more to gain from an analysis of full-year 2012 than the month of December.  I’m going to concentrate on the former to start out and only make a comment or two about the latter at the end.

2012 results

The sector price returns for the S&P 500 in 2012 were as follows (my suggested overweights marked by +):

Financials          +26.3%

Consumer discretionary          +21.9%          +


Healthcare              +15.2%

S&P 500          +13.4%

IT               +13.2%               +

Telecom          +12.5%

Industrials          +12.5%

Materials          +12.2%


Staples          +7.2%

Energy          +2.3%

Utilities          -2.9%.

My first observation is that, despite lots of angst throughout the year, 2012 was an excellent time to be owning stocks.

Sectoral results can be broken out into three general groups.  Financials and Consumer Discretionary outperformed handily.  Half the sectors were bunched around the index return.  And Staples, Energy and Utilities all exhibited substantial underperformance.

In hindsight, the recipe for outperformance was simple–overweight either Financials or Consumer Discretionary (or both) and/or avoid Staples, Energy and Utilities.  On a sectoral basis, nothing else mattered much.

Is there any sense to the way the sectors fell out?

What is/was the market telling us?

My intention in answering these questions is not to delve deeply into details (as I might in talking about an individual stock) but to remain on as broad and simple a level as possible.

I’m not a big fan of Financials, but I think the big positive factors were increased clarity about the rules banks would be operating under and better visibility about what’s on the balance sheets.  Another year of economic recovery didn’t hurt the fundamentals.  And this may be a case of a laggard catching up.

Consumer Discretionary is the least risky of the up-market sectors because it is driven by lots of purchases by just about everyone, rather than on huge orders from a small number of large companies.  Recovery last year spread out somewhat from the wealthy to more ordinary Americans.  Pickup of the housing market, which helped buoy consumer confidence, was another tailwind.

Utilities are the first place anyone goes to look for income.  But the sector is all played out.  A harbinger for Treasuries?

Energy is more or less a function of oil prices.  They, in turn, rise or fall on economic activity in emerging economies, which were not so hot in 2012.

Staples have unusually large exposure to the EU.  € weakness has translated into lower profits.  Cheaper raw materials have not been a complete offset.  And in non-inflationary times it’s extremely difficult to raise prices.

The overall message?

The ticket to success would have been to concentrate on US consumers and the repair of the US banking system.  Trying to play strong global economic growth through commodity sectors would have been a losing bet.  So, too, would have been looking solely for income in the utility sector.

the December S&P

Would December results have delivered the same message?  Here is the sectoral performance order:

Financials          +4.6%

Materials          +2.9%

Industrials          +2.3%

S&P 500          +0.7%

Energy          +0.5%

Consumer discretionary          +0.2%

IT          -0.1%

Utilities          -0.2%

Healthcare          -0.4%

Telecom          -1.1%

Staples          -2.5%.

On December 31st, when traders saw the first signs that a deal to avoid the fiscal cliff might come about, the S&P was up 1.7%.  Staples, Financials, Utilities Telecom and Healthcare all lagged.  Aggressive sectors were all up about 2%, with IT leading at +2.2%.  In other words, the market’s final hurrah for 2012 didn’t change the month-long pattern significantly.

If we take the shift toward more aggressive sectors seriously, it would imply a market expectation of either higher relative economic growth outside the US in 2013 than inside, or higher absolute growth in the global economy in toto this year vs. last.

More on this topic in the days to come.

model portfolio

The model portfolio?  For the year it gained a modest 20 basis points vs the index, based entirely on the overweight in Consumer Discretionary.  For January I’m actually going to do something.   I want to close the overweight in CD and double the overweight in IT.

December 2, 2012

Keeping Score for the month of October was a casualty of Superstorm Sandy.  Things were so messed up around here–I can even hear the sound of chainsaws clearing away debris as I’m writing this on a Sunday morning more than a month afterward–that I’m only realizing the omission now.  …oh well.

A brief recap of October:  The S&P 500 was down about 1.4%.  Telecom and IT, both falling more than 5%, were the big losers.  Healthcare, Financials and Utilities were the relative winners, with the latter two posting absolute gains as well.  The pre-Halloween market was showing the greatest hostility toward tech/cellphone names as it expressed fears of continuing global economic slowdown.

The end result for November, in contrast, was relatively benign.   The S&P 500 headed south right after the election, but reversed course after a week or so, posting a capital changes (i.e., not counting dividend payments) return of +.28%.  The total return (i.e., including dividends) of the index for the month was +.58%.

A somewhat geeky note:  dividends added .3% to the index return in November.  That’s more than normal.  Annualizing the November figure would imply a dividend yield on the S&P of a whopping 3.6%.  The yield on a recurring basis is closer to 2.1%-2.1%, I think.

The November boost is the effect of companies making large one-time payouts of cash, mostly sitting around in US banks–although COST, for one, appears to be borrowing $3 billion to fund its special dividend.  They’re figuring the jump in the Federal income tax on dividends that’s sure to come for 2013 will be large enough that it’s better to return the money to shareholders now.

November performance

Let’s look at the sectoral breakout of the S&P 500 for November (with my overweight sectors marked with +).

Consumer discretionary          +3.0%         +

Materials          +1,5%

Staples          +1.4%

Industrials          +1.3%

IT          +.8%          +

Healthcare          +,3%

S&P 500          +.3%

Telecom          -.9%

Financials          -1.1%

Energy          -1.8%

Utilities          -5.0%

For a change, I don’t think there are any overarching themes at work in shaping the month’s results.  Rather, the sector numbers show a combination of bottom fishing for cheap stocks (IT) and industry-specific factors.  Rebuilding the tri-state NY area after Sandy, for example, will use a lot of materials.  Utilities are being hit both by the idea that their dividends–the principal attraction for many of them–will become less valuable, after tax, next year.  Those in areas affected by Sandy will likely also be squeezed by being forced to modernize rickety infrastructure, while getting little in the way of rate relief.

What I found most interesting in the month was the ability of the index over the second half of the month to absorb bad news and still close flat or slightly up.

I don’t think this is because Wall Street suddenly has high hopes for economic help from either political party.  In fact, Washington is the source of the downward pressure the market is feeling.  (To me, Washington continues to act in pretty much the same way as the Japanese government did during the opening years of that country’s continuing economic slump.  That’s now 23 years long, and counting.  Not a comforting thought.  But this possibility is not, and should not be, a current market worry, in my opinion.  More about this in another post.)

Instead, as I wrote in my October 1st Keeping Score, I think the market is beginning to notice signs of life from emerging markets, especially China, and, of all places, from the EU.  A consensus seems to be forming–rightly or wrongly, I don’t know–that the US will somehow avoid recession despite political gridlock and that a better housing market + some business spending will create a bit of  positive economic energy.

The picture of 2013 that is starting to emerge:  gains in the half of S&P 500 profits that come from abroad, a US half that should be underweighted but which won’t perform badly enough to wreck the overall party.  More about this in my annual strategy posts.

The model portfolio?  October was a poor month (loss of about 10bp to the index), mostly due to a sagging IT sector.  November reversed most of those losses, as Consumer discretionary outperformed smartly.  Year to date, both sectors are outperformers, Consumer by a mile, IT by a little bit.

No changes.

October 1, 2012

Another good month ends a solid quarter in what has been so far a surprisingly strong stock market year.

One obvious reason for keeping score is to see how we’re doing, not only in absolute terms but also against a benchmark index we’ve selected for ourselves.  A second, closely related, one is to consider making changes to our sector positioning–or to one or more of our individual stock holdings–if we’re underperforming.

A third is to us the numbers to try to describe what investors in the aggregate must be thinking in order for the market to be performing in the way it is.  From that description we can get ideas about whether to go with the flow or make deliberate contrary bets.

Look at September.  What’s important, I think, is not so much the sectors that did well, but the ones that underperformed.

Telecom          +3.9%

Healthcare          +3.8%

Materials          3.6%

Energy          +3.3%

Financials          +3.3%

Consumer discretionary          +3.1%      +  ( = a model portfolio overweight)

S&P 500          +2.4%

Industrials          +1.5%

IT          +1.2%          +  (the second overweight)

Staples          +1.1%

Utilities          +.9%.

Energy and Materials, which tend to do well when the market believes we’re in a period of strong overall growth, are outperforming.  If we look over the past three months, however, the direction of these two sectors is less clear.  And Industrials, the third sector that benefits from broad economic strength, has been a laggard.

Looking at underperformers, on the other hand, the message is very clear.  Staples and Utilities, the ultimate defensive groups, continue to be at the bottom of the pile–as they have been all year.

Take a three-month view, to get a somewhat larger perspective.  The sectors rank as follows:

Energy          +9.5%

Consumer discretionary          +7.1%          +

IT          +7.0%          +

Telecom          +6.8%

Financials          +6.4%

S&P 500          +5.8%

Healthcare          +5.6%

Materials          +4.5%

Staples          +3.1%

Industrials          +3.0%

Utilities          +1.6%.

Which sectors are consistent during the two time frames?

Which change?

On the positive side, Telecom, Energy, Consumer discretionary and Financials are winners during both periods.

On the negative, Industrials, Staples and Utilities are all losers.

Materials and Healthcare go from underperforming to outperforming.  IT goes in the other direction.

What to make of all this?

What kind of economic environment is consistent with these patterns of sectoral performance?  It seems to me the sectors are saying:

–it’s not a time for defensive stocks, except for Telecom, whose character is being transformed by the smartphone boom

–it’s also not a time to bet that companies are going to be making heavy investments in Industrial plant and equipment.  IT investment may even be beginning to sag, implying that business cash flows are flattening out or even starting to shrink a bit.

–Energy and Materials are both signaling that economic growth is getting better (presumably in areas like consumer that don’t necessarily depend on new capital spending).  So too is Consumer discretionary, which has been consistently outperforming throughout the year.

My read:  the S&P is saying that investors are thinking that, while world economies may not be great, they’re starting/continuing to get better.

one step further

Let’s say I’m correct in interpreting what S&P prices are saying.  We still have to ask two questions:

–is the market correct in what it’s thinking?, and

–is the market’s assessment something to bet on, or are its beliefs so long in the tooth that the correct move is to bet against them?

my thoughts:

For almost the first three years from the market bottom in March 2009 (just about the point I began writing this blog) the best positioning was to emphasize broad economic recovery, emerging markets and wealthy consumers.

For the past six or nine months, it has been better to focus on the US (not simply US-listed equities, but stocks that have their profit centers in the US) and on the broadening of domestic recovery to include average Americans.  During this time, it’s also been important to deemphasize the EU and emerging markets.

I think we’ve now reached another, more subtle inflection point.  The worst is probably over for China, where new Communist party leadership is now in the process of being installed.  The EU has probably touched bottom as well, although, unlike China, the bounceback in Europe is likely to be a very protracted affair.

Even the US political outlook seems to be clarifying itself, with a weak Democratic incumbent pulling ahead of an even more flawed Republican challenger in the general election.  This doesn’t suggest that the country’s fiscal problems will be solved.  It simply lessens uncertainty about the tack Washington will take next year.

Therefore, it’s ok to begin to extend a portfolio’s reach again to international operations, especially those in Asia.

September market action seems to me to reflect pretty accurately the underlying economic fundamentals.  These conditions appear to me likely to prevail for a while yet.  It’s too soon to take a contrary position.

The model portfolio?  It lost a little in September, with gains in Consumer discretionary more than offset by losses from IT.  No changes, though, despite my comments in the paragraph above.  If worldwide economic growth is stronger than I anticipate, IT will be a principal beneficiary.

September 5, 2012

What I find striking about the August performance of the S&P 500 is that it delivers a simple, modest–but clearly–bullish message. at a time when economic and political affairs around the world appear unusually opaque.  Look at the numbers:

IT          +4.8%

Consumer discretionary          +4.2%

Financials          +3.0%

Materials          +2.2%

S&P 500          +2.0%

Energy          +1.9%

Industrials          +1.1%

Healthcare          +0.8%

Staples          -0.7%

Telecom          -2.5%

Utilities          -4.8%.

The key points:

–the index is up for the month

–the best sectors are ones that typically star when economies are expanding, but not rip-roaring upward

–the next set are the more highly cyclical sectors–Materials and Industrials

–the laggards are the sectors that perform well when things aren’t going so well.

Year to date figures deliver much the same message.  Telecom ranks higher on the list, and Energy and Materials lower.  But the overall index is up 11.9% through the first eight months of 2012.  Toss in dividends and that becomes 13.5%.

Where to from here?

I’ve been noticing that many market commentators have been recently turning bearish.  Some are very specific about an impending downturn in the S&P 500, predicting that the fall will begin within days.

The reality is that no one can predict short-term market movements consistently.  The interesting thing is that so many would be seeking publicity about such flip-of=a=coin predictions.

Three factors suggest that the market will struggle from here:

1.  1400-1420 has proved to be a significant barrier to market advance in the recent past.

2.  Virtually all mutual funds in the US end their accounting year on Halloween.  From mid-September through mid-October they do their yearend housecleaning. They also sell winners if they want to make their yearend distribution of profits a bit bigger; they sell losers if they want to make it a bit smaller.  Both choices involve selling.  Since everyone knows this is happening, buyers typically retreat until after this activity is over.  As a result, mutual fund selling typically temporarily depresses the S&P by several percentage points.

However, my understanding is that mutual funds are still swamped with tax losses incurred in selling they did to meet redemptions at the market bottom in 2008-2009.  Until such losses are used up, no distributions are possible.  So I don’t think mutual funds will be a source of downward pressure this year.

3.  Uncertainty about the US election and the “fiscal cliff” that looms ahead in January.  Yes, these are significant worries.  On the other hand, focus on them suggests enough positive news has developed in the EU and China to knock them out of the #1 spot.

Yes, I think the market will struggle to advance over the next couple of months.  But I know I could easily be wrong.  And for all but the most speculative short-term traders, temporary concerns aren’t a good reason to change the fundamental orientation of a portfolio.

The model portfolio had a good month, with overweight sectors IT and Consumer discretionary at the top of the outperformer list.  No changes.

August 2, 2012

Looking just at the sectoral performance of the S&P 500 for July, this was an oddball month. The index finished up by 1.3% for July, but the index-beating sectors were mostly the defensive ones.  Take a look at the sectoral returns:

Telecom          +5.5%

Energy          +4.1%

Staples          +2.6%

Utilities          +2.5%

S&P 500          +1.3%

IT          +1.0%          +

Healthcare          +.9%

Industrials          +.4%

Financials          +0.03%

Consumer discretionary          -.3%          +

Materials          -1.33%.

What’s going on?

I think there are two factors involved:

–European leaders have made very strong statements about their commitment to preserve the Eurozone.  These may ultimately turn out, as have all previous pronouncements, to be just so much hot air.  But they at least sound convincing to me.  At the same time, 2Q12 earnings season for the S&P is making it clear that the US economy is slowing down to a greater degree than the consensus (including me) had thought just a few months ago.  In relative terms, this is a plus for the EU.

Combined with the realization of just how cheap Eurozone companies have become (a dividend yield of over 5%), this situation has investors flirting with the idea of increasing equity exposure to the EU.  Buying US Staples, many of which have large EU presence, is a relatively low-risk way of doing so.

–Slowdown in the US implies three shifts:

–away from highly economically sensitive names (something that has been going on for a long time),

–toward the strongest firms in each sector (so a de-emphasis of sectoral positioning), and

–toward areas benefitting from structural change.

In particular, investors are seeking to avoid fallout from the GOOG/Samsung vs. AAPL smartphone wars by buying the shares of VZ and T, whose relative situation is improving as the Android vs.iOS conflict plays out.  Hence, the outperformance of Telecoms.

August is vacation month…

…in Europe, anyway.  It’s also the time when Japan shifts into low gear to watch the national high school baseball tournament (not that the rest of the world notices any trading falloff from this source anymore).  Usually, however, by the third or fourth week of the month, the markets begin to make it plain how they see the final stanza of the year playing out.

My guess is that we’ll see a continuation of the slow growth theme.  That would imply a continuing heightened emphasis on price, an insistence on high quality of earnings, and a search for growth that isn’t dependent on the business cycle.

At some point, the markets will begin to factor in the results they expect from the presidential election in November.  And there’s always the traditional late September market swoon to consider.  But there’ll be time enough for that a month from now, I think.

My model portfolio?  

It’s been overweight IT and Consumer discretionary.  Year-to-date, that’s been a good place to be, but this month that emphasis cost 10bp in relative performance.  Although I’m still an owner of VZ, and therefore should be thinking harder about Telecoms, I don’t see any reason to make changes, though.

July 2, 2012

crosscurrents galore

June started off on a sour note, as the S&P 500 dipped to 1266 on the second day of last month’s trading.  With the perspective of four weeks of hindsight, that decline appears to have completed an 11% correction that started in early April.

Two major factors were involved.  There was a typical yin/yang response to the 30%+ gain the S&P had made from October-March.  And, one by one, the economic lights appeared to be turning down in the major geographical regions of the world–China, the EU and, finally, the US.

From that point, however, the market gained 7.5%, posting a 4% gain for the month as a whole.

On the other hand, the bulk of the net advance, 2.5 percentage points, came on the final trading day.

S&P sectors

For the month as a whole, sectoral returns on the S&P 500 were as follows (overweights in the model portfolio indicated by +):

Energy          +5.6%

Healthcare          +5.6%

Telecom          +5.4%

Financials          +4.9%

Materials          +4.6%

S&P 500          +4.0%

Utilities          +3.8%

Industrials          +3.5%

Staples          +3.3%

IT          +3.0%          +

Consumer discretionary          +1.8%          +

June 29th

Trading on June 29th was not only strongly positive.  It also made a difference in the monthly place order of every S&P sector.  The direction of the shift is very clear.

Moving up:

Energy, Materials, Industrials, IT, Financials and Healthcare. Ex Healthcare, which moved on the Supreme Court decision, all are aggressive, pro-GDP growth sectors.

Moving down:

Telecom, Utilities, Staples, Consumer discretionary.  The first three are traditional defensive sectors.  CD is the most defensive of the up market sectors.

Most sectors moved one notch.  Utilities fell three.

a turn in EU sentiment?

Clearly, the reason for the strength, not only in the US but in all world equity markets, was news from the latest Eurozone crisis summit meeting.  I’ve lost track of the number of times EU leaders have met to discuss this topic so far–14?, 15?  In any event, expectations for any positive outcome weren’t high.  But for whatever reason, world markets began to focus on what the EU has been repeatedly signaling over the past several weeks–that its members are negotiating seriously for the first time about having the EU as a whole taking responsibility for the debts of the weaker countries.

What markets appear to be saying is that it no longer makes sense to make the flat-out bet that conditions in the EU will become progressively worse.  This doesn’t mean that a solution to the region’s debt problems will magically appear overnight or that EU economic growth will suddenly become robust.  It just means that taking the negative position is no longer a sure-fire winner.  So investors are adjusting their extremely defensive–or maximum short–portfolio positions.

unduly negative sentiment?

I’m not a frequent watcher/listener of financial talk shows.  The very confident way in which they spout crazy and nonsensical stuff ends up getting me scared.  Still, in my occasional encounters in June, it’s struck me that the media have been radiating especially intense–and uniform–negative sentiment.  For example:

–I saw the Wells Fargo equity strategist, Jim Peterson, on CNBC early in the month.  He was invited to appear on a morning show mostly to make fun of him for having predicted the S&P would end the year in positive territory.

–Tom Kean of Bloomberg’s morning Surveillance program started to sound to me like a boiler room broker, frequently interjecting the latest negative news on EU bond yields in order to create a panicky mood among listeners.

–I heard a striking number of analyst interviews where the reporter said something like “How can you possibly say that, when…” in response to any optimistic observation.

In all these cases, there was no spirit of inquiry in the “news” programs. The interviewer portrayed himself as an expert.  The analyst/strategist was portrayed as obviously wrong if he disagreed with the interviewer’s beliefs.

the charts

The rise of the S&P 500 came to a screeching halt when it hit the 1400 level.  I think it established the lower end of a trading range last month at around 1280-1300.  At the current 1362, we’re somewhere in the middle, as likely to go up as to go down.

where to from here?

The US economy, as measured by new job creation, has clearly been slowing over the past month or two–in a way that I, for one, hadn’t expected.  There’s no consensus about why this is happening.  Is it because pent-up demand for labor created by the layoffs of early 2009 have finally been satisfied, as Ben Bernanke is suggesting? Is it because US employers have become worried by recession in Europe and slowdown in China?

While the slowdown persists, equity markets will be more vulnerable to the emotions of short-term traders.  The picture that’s positive for stock may well be that:  we find the EU is not as bad as today’s prices assume; we find the same to be true of China; and we begin to see that the US, too, will have an up year for growth in 2013.  Each development adds more underpinning to a market advance.

Near-term visibility for earnings will not be as good as I’d hoped, however.  I see no reason to change my positive market view, which is based on the resilience of the consumer and on innovation in IT, rather than the expectation of strong worldwide GDP growth.  But I’m thinking I have to monitor both economic developments and my stocks more closely than usual.

model portfolio?

It had a bad month.  IT and Consumer discretionary were dead last among sectors during June.  Final-day trading didn’t do much good, either.  It merely allowed the two to swap ninth and tenth places.  The model portfolio lost 8 of the 30 basis points in outperformance it had accumulated through May.  No changes.

June 1, 2012

Score one for the bears in May

After a surge beginning early last fall–when global investors celebrated, incorrectly as it turns out, their conviction that the EU crisis had been put to bed for the final time–the markets flattened out in March and April.  Then they took back some of their gains in May.

sectoral performance

Not only did world markets decline in May–the S&P 500 was a relative “winner” at -6.3%–but they showed a clear defensive pattern.  The relative performance order of the S&P sectors was as follows (my overweights marked by  + ):

Telecom          +2.6%

Utilities          -.1%

Staples          -1.3%

Healthcare          -3.9%

Consumer discretionary          -5.9%        +

S&P 500          -6.3%

Industrials          -6.4%

IT          -7.9%        +

Materials          -8.0%

Financials          -9.4%

Energy          -10.6%.

Energy and Finance

To my mind, the two notable sectors are Energy and Financials, the two worst-performing sectors for the month.

The physical process of oil extraction requires that relatively steady amounts of petroleum be brought to the surface during any given period of time.  Supply and demand have been very closely balanced for years.  Small changes in demand can, therefore, make large changes in the price.  World markets appear to be betting that even a mild slowdown in economic activity will push the price of crude down dramatically.

The markets also seem to believe that we’ll ultimately find out that banks have more exposure to the EU than even they realize now.  JPMorgan’s multi-billion dollar hedging accident won’t have discouraged that view.

panicky EU sellers

The month has been marked by panicky selling, which I think has the fingerprints of Europe all over it.  Asian markets like Hong Kong seem to me to have, as usual, been particularly negatively affected.  Even in the US, daily trading has been opening with declines, followed by afternoon rallies after European market participants have gone home for the day.


The botched Facebook IPO is, in one sense, not much more than a colorful sideshow.  The mistake, if that’s the right word, the underwriters made was to increase the dollar amount of an already large offering by a whopping 40% at the last minute.  That took out every potential buyer, leaving no demand to be satisfied once the stock started trading.  The far greater damage is to the trust of retail investors in their brokers after seeing themselves sandbagged with many times the expected amount of FB in their accounts on the IPO morning.  Then, of course, they had to stand by helpless as the NASDAQ trading snafu prevented them from selling.


The main issue the markets are facing is, for once, the obvious one–will the EU hold together?  Ever the optimist, I think the answer is yes.  The main bone of contention is that Germany wants a commitment from all parties to closer political integration before bailout money flows;  the rest of the EU wants the money before the commitment.  The only near-term positive I can see on this front is that the situation seems to be coming to a head.

not all gloom

Although the market tone is clearly bearish, not all signs are gloomy.  For instance,

–Hedge funds are sifting through the carnage of the EU stock markets looking for bargains.  Trian Fund Management, for one,  has recently shown up on the share register of Intercontinental Hotels Group PLC (I own a little of IHG).

–Reasonable, though not overwhelmingly positive, news continues to come from the US economy.  This is one reason US stocks have been a relative safe haven.

–Technically, the S&P 500 seems to want to hold the line at around 1300.

the model portfolio?

It underperformed, but by only a few basis points.  That’s much less than I would have expected.  What’s more interesting–though a bit off the topoic of Keeping Score-is the good performance of big telecoms in the US and of dividend-paying stocks in general.

No changes.

May 1, 2012

Happy May Day!!!

After four straight up months, the S&P 500 flattened out in April.  Notice, too, that, in contrast to its orientation earlier in the year, there was a distinctly defensive cast to the market last month.  The one exception–Consumer Discretionary, which continued to shine.

There was more than that to April, though.  Looking inside the sectors, the worst performing stocks were generally the ones that depend on global growth; the best stocks were plays on broadening economic recovery in the US.

The AAPL effect?  That stock underperformed the S&P last month by about 260 bp.  That means it clipped 8 bp off the S&P 500 performance and around 40 bp from the IT sector index results.  In other words, AAPL didn’t move the needle much.

sectoral performance in April

Sectoral performance in April broke out as follows (with my overweight sectors marked by +):

Telecom          +4.2%

Utilities          +1.8%

Consumer Discretionary          +1.2%        +

Staples          +.1%

Healthcare          -.3%

S&P 500          -.8%

Energy          -1.0%

Materials          -1.0%

Industrials          -1.1%

IT          -1.9%          +

Financials          -2.5%

Contrast this with year to date results for the index:

IT          +18.8%          +

Financials          +18.4%

Consumer discretionary          +17.0%          +

S&P 500          +11.2%

Materials          +9.5%

Industrials          +9.4%

Healthcare          +8.1%

Staples          +4.9%

Telecom          +4.9%

Energy          +2.4%

Utilities          -1.0%.

Two reasons for the contrast:

–renewed fear of EU banking problems, which did in the financials, and

–macroeconomic indicators that suggest growth in the US is slowing from the pace of the first quarter.   The consensus thinking, which I’m not 100% convinced is correct, is that unusually warm winter weather in the northern half of the US pulled economic energy usually seen in the spring back into January and February.

On the other hand, we’re well into quarterly earnings reporting season.  So far, results are coming in, in the aggregate, considerably better than the expectation that there would not be much yoy change.

Bubbling below the surface of results that will probably average 6% better than a year ago are two allied patterns:

–much bigger positive surprises by some stocks, and much bigger negative surprises by others, along with

–strong market reaction, both positive and negative, to the results.

At this point in the market cycle, these individual stock plusses and minuses are likely to be more important than the sectoral patterns.

what to do

Despite the negative macro indicators, I don’t expect the type of summer swoon this year that we experienced last summer.  Instead, I think we’ll remain flattish until we have a better read on what 2013 will be like.  Most relative gains will come from good selection of individual stocks.

I also think we’ll continue the present pattern of outperformance by US-oriented companies, especially those which benefit from a recovery that is slowly broadening to encompass more and more families.

model portfolio

The model portfolio?  No changes.

Last month, underperformance by IT almost completely offset outperformance by Consumer Discretionary, leaving only a couple of basis points of relative gain on the table.

April 2, 2012

Another up month for the S&P in March.  Gains for the index since the October 2011 lows now amount to 30%+.  That’s an eye-popping result for a six month period, although we did start the count from the bottom of a three-month long 20% market swoon.  In fact, on a total return basis (including dividends, not just capital gains), the index is now right around an all-time high, having recouped all its losses from the Great Recession.

What’s just as noteworthy is that the financial sector, which comprised a quarter of the index in 2007, now amounts to no more than 15%–implying that the rest of the S&P is substantially higher today than at the previous market peak.  To my mind, it’s also interesting–and possibly important for us as investors–that while the economy felt frothy in 2007, it feels anything but that now.  If my perception is correct, and not just a reaction to my writing this on a rainy day, it would suggest further index gains are in store.

March S&P results

The sectoral composition of returns for the month seems to me to continue to reflect some optimism, but not a whole lot.  The breakout (with my overweights marked by +) is as follows:

Financials          +7.3%

IT          +5.0%          +

Consumer discretionary          +4.4%          +

Healthcare          +4.3%

S&P 500          +3.1%

Staples          +3.0%

Industrials          +1.2%

Utilities          +1.0%

Telecom          +1.0%

Materials          +.1%

Energy          -3.4%.

1Q12 S&P figures

For the first quarter, the industry breakout is some what similar, although March shows one significant change.  The 1Q12 figures:

Financials          +21.5%

IT          +21.1%          +

Consumer discretionary          +15.5%          +

S&P 500          +12%

Industrials          +10.7%

Materials          +10.6%

Healthcare          +8.4%

Staples          +4.8%

Energy          +3.4%

Telecom          +.6%

Utilities          -2.7%.

what the numbers mean

The constant winners for both the month and the quarter are Financials,IT and Consumer discretionary.  The big losers in relative terms are the defensive groups.  Energy is in a world of its own.  The notable index shift in March is that Industrials and Materials, which are typically stars during times of especially robust economic growth, are beginning to sag.

where to from here?

To maintain a positive stance on the stock market, I think investors have to deal with, and resolve in a positive way, two issues:

1.  Is the rise in US government bond yields that we’ve seen in March the beginning of the normalization of interest rates from the emergency lows of the past few years?  My guess is that it is, despite Mr. Bernanke’s wishes to the contrary.  But my view is very preliminary and subject to being revised as new data come in.  If what I’m thinking is correct, the rate rise could be a multi-year process.

Typically, during periods when rates have risen back to “normal” levels, stocks have gone sideways to up.  Accelerating economic profits prompt the rate rise.  They also act as a counterweight to the negative effect on equities of the higher cost of money.   In today’s world, with so many hedge funds willing and able to use financial derivatives, the ride could be faster than normal–and therefore bumpier.

2.  What are economic prospects for 2013?  Typically, investors don’t need to think about the following year until summer.  But 12% market gains through  March aren’t typical, either.  That’s the reason 2013 is taking center stage earlier than normal.

I find this a much more difficult issue than interest rates.  As Mayor Bloomberg of NYC pointed out in a Wall Street Journal  op-ed piece last week, both national political parties are telling their adherents fanciful stories about how the government deficit will simply disappear without much effort–stories that the tellers must know are untrue.  By inaction (sharp fiscal contraction is set to go into effect on January 1), or by actually drinking the kool-aid they’re peddling, will Washington turn what should be a mild up year in 2013 into a train wreck instead?  I hope not, but I don’t know.

The model portfolio?  Putting 2.5%  more than the market weight into IT and another 2.5% into Consumer discretionary would have gained a bit over 10 basis points in performance for the month.  For the quarter, the addition would have been just over 30bp.  No changes.

March 1, 2012

February was another good month for the S&P 500, although the market appears to have encountered very strong resistance around the 1365-1370 mark during the last week.  This corresponds with the high point achieved by the index in May 2011.

Round numbers on the Dow also always seem to create psychological resistance on the way up, so–for once–the Dow may be the more important index to pay attention to for the time being.  Certainly, my reading of the S&P during the early days of the market’s swoon in 2008 doesn’t turn up anything significant technically about 1365-1370.

The S&P clearly carried over its bullish tone of January into February.  Sectoral performance (with my overweights market by +) was as follows:

IT          +7.1%          +

Energy          +5.5%

Financials          +4.8%

Consumer discretionary          +4.5%          +

S&P 500          +4.1%

Telecom          +3.7%

Staples          +1.7%

Industrials          +2.3%

Healthcare          +1.0%

Utilities          -.01%

Materials          -.6%.

Year to date, the index is up 8.6%.  IT (+15.3%), Financials (+13.2%) and Consumer discretionary (+10.7%) are the clear stars.  Last year’s defensive darlings are now riding in the caboose, with Utilities and Telecom actually in negative territory so far in 2012.

One oddity about these results.  By itself, Apple now constitutes 4% of the entire S&P and almost 22% of the IT sector, having risen by 34% since January 1st.  Close to half the performance of the IT sector so far in 2012 is due to Apple.  Perhaps more remarkable, though much less influential in index performance, Microsoft, #3 in size in the S&P and #2 in the IT sector, is running contrary to form and has risen by 22% over the past two months.

Where to from here?

The S&P is up by 27% from its October low, so we’re due for a period of consolidation.  That may what’s in store for us in March.  Reaching 13,000 on the Dow may have been the trigger for a pause.  But the US economy is clearly getting a second wind, and both the EU and Japan have begun significant monetary stimulation of their economies.  There may be limits to how fast zombies can walk, but their economic situation is better than it would otherwise be.  So my guess is that any water treading or mild slippage that we experience now is only a prelude to further strength later on.

Also, if Jim Paulsen is correct–and I think he is–that 2012 will be a year when investor confidence is restored, then it’s possible that buyers will factor in more than today’s earnings into stock prices, buoying them further.

My model portfolio?  Overweighting IT and Consumer discretionary by 2.5% each has added about 25 basis points to performance so far in 2012, two-thirds of that from IT.  That’s not bad for a strategy that’s hugging relatively close to the index.  No changes for this month.

February 3, 2012

January was a very positive month for the S&P 500.  Yes, the month started off with its typical seasonal peculiarities.  There was the “January effect,” meaning the bounceback of small, illiquid underperformers from depressed levels reached during year-end tax selling in December.  And taxable investors did their usual aggressive trimming of their 2011 winners, once they nursed capital gains into 2012.

But, as I see it, the market quickly shrugged off  these temporary negatives, for four reasons:

–the economic recovery in the US is continuing to broaden,

–investors have begun to believe (correctly, in my view) that the domestic housing market is finally bottoming after almost five years of decline,

–the Fed is promising ultra-low interest rates well into 2014–making fixed income less attractive, and

–the worst of the Eurozone financial crisis may be behind us.  At the very least, we’re entering the endgame where, no matter what happens, uncertainty will be over.

sector performance

By sector, with my portfolio overweights marked by +, the S&P 500 played out in January as follows:

Materials           +11.1%

Financials          +8.0%

IT          +7.6%          +

Industrials          +6.9%

Consumer discretionary          +5.9%          +

S&P 500          +4.4%

Healthcare           +3.0%

Energy          +1.5%

Staples          -1.7%

Utilities          -3.7%

Telecom          -3.9%

not just a reaction to 2011 performance

Arguably, the January performance of Materials and Financials is merely bounceback from a horrible 2011.  But Consumer Discretionary and IT were both outperforming sectors last year.  And they’re still in the plus column, so last month wasn’t simply a reversal of 2011 form.

As I’ve written elsewhere, I don’t think we’re starting a new bull market today.  Rather, I think we’re in the unusual position where not all economic sectors turned at once.  We’re now getting something akin to the booster stage of a rocket firing.  I think this second stage still has some life in it–to 1400 on the S&P?

the Eurozone

One fly in the ointment–the continuing EU financial crisis.

I find the Eurozone mess hard to handicap.  My hunch is that Greece isn’t salvageable, but that Italy is taking the first steps in a fundamentally positive economic restructuring.   I’m guessing that most market participants already operating with something close to this assessment in mind, but I have no concrete evidence.  Stock prices are certainly acting in line with this, though–as if there won’t be much negative market fallout as/when a decisive break with Greece occurs.

Still, we all must at least consider how to guard/should one guard against the chance that news from Europe will be a lot worse than this.

My decision has been to keep a bullish orientation, but underweight Europe.  I’m trying to focus on sectors and individual securities that embody a specific secular growth idea, and not just the bet that overall economic conditions will be robust (by the way, I don’t imagine they will be).  I’ve also identified stocks to sell quickly in case the situation shows signs of marked deterioration.  This stance is kind of aggressive, but then I’m a growth investor.  What else would you expect?

a word about the model portfolio overweights

The model portfolio had a good month, up 25 basis points or so vs the market.

January 3, 2012  looking at full-year 2011 

The numbers pretty much speak for themselves.  For the full year, sectoral returns for the S&P 500 are as follows:

Utilities          +14.8%

Staples          +10.5%

Healthcare          +10.2%

Consumer discretionary          +4.4%

Energy          +2.8%

IT          +1.4%

Telecom          +.8%

S&P 500          0%

Industrials          -2.9%

Materials          -11.6%

Financials          -18.4%.

It’s not a perfect bear market pattern, but it is bearish.  The index is flat rather than down, for one thing.  IT and Consumer discretionary outperformed, for another.  But seriously defensive sectors–Utilities, Staple, Healthcare–all outperformed dramatically.  The most economically sensitive–Materials and Industrials–underperformed.

Year-to-date through September gives a clearer bearish picture, since the index did rally by 11%+ in the fourth quarter.  Here are those figures:

Utilities          +7.2%

Staples          +1.0%

Healthcare          +.8%

Telecom          -5.2%

Consumer discretionary          -6.7%

IT          -7.5%

S&P 500          -10.3%

Energy          -12.4%

Industrials          -16.1%

Materials          -23.0%

Financials          -25.9%.

Practically all of this damage was done during the third quarter.  The drop began in early July.   Through the October 3rd intraday low, the index loss was just over 20%.  And the performance pattern was the typical bear movement characteristic of investor belief in an upcoming recession.

Most of the downdraft, it seems to me, was caused by worries over the EU, although the August Job Situation report–no job growth at all in the US–also made for scary reading.  Those poor figures were revised up substantially in subsequent months, however.

Depth of decline and sectoral performance both argue that 3Q11 is at least part of a bear market.  Sectoral performance characterizes 2011 as a whole as a bear phase, as well.

The three pertinent questions for us today are:

–can a bear market come and go in three months?   …experience says “no,”  at least for garden variety business cycle bears.  They last on average for nine months to a year.

–have we already seen the lows?

–how much further time has to pass before investors can safely become more bullish?

More about this in my strategy for 2012, which begins tomorrow.


January 2, 2012

December is usually roiled by investing crosscurrents…

…and is therefore a hard month to read.   Specifically:

–taxable investors, both individuals and (mainly financial) corporations, do their yearend tax selling during the month.  They get rid of clunkers and use the tax losses generated to offset gains created when they trim winners that have grown too large.

–far-sighted investors, understanding that their performance for the current year is already effectively locked in, make strategic portfolio changes in preparation for the following year, and

–less reputable professionals use the light volumes of the year’s final week to manipulate the prices of the positions they hold–a process they euphemistically call “window dressing.”  Yes, this is illegal in most places.  No, it’s not ethical or nice.  But it still happens  …because it boosts the fees the manipulator collects from clients or the bonus he is paid by his employer.  Among stocks, the places to look for suspicious price movements of this type are among small-cap stocks and in markets outside the US.

This year’s December fluctuations

were also influenced by the continuing turmoil in the EU.  I’ll write about this in greater detail over the next week or so in my strategy for 2012.  Basically, though, I see two opposing movements:

–On the plus side, I think the period of maximum uncertainty about the Eurozone is behind us from an equity investment point of view.  I don’t mean everything will be peachy in the E-zone in 2012–far from it.  But I think we now know enough about where events are headed to make intelligent guesses about what will occur, and therefore can assess whether individual stocks are cheap or expensive.  I think potential buyers have already begun to nibble.

–On the other hand, some large EU-centric investors probably still have portfolios that they find to be too risky overall or that have weightings they consider structurally unsound.  They’re not getting new money in soon, in my opinion, so the only way they can rebalance is to sell the riskier securities (equities and EU-periphery bonds) they hold.

The net result of all of this?  …a defensive month that ended a very aggressive quarter.

S&P 500 returns by sector

for December are as follows (my overweights marked, as usual by + or ++):

Telecom          +3.7%

Utilities          +3.0%

Healthcare          +2.8%

Staples          +2.4%

Financials          +1.6%

Consumer discretionary          +1.0%          +

Industrials          +.9%

S&P 500          +.9%

IT          -.9%          +

Energy          -1.1%

Materials          -2.4%.

The raw numbers say that in December investors wanted to shun Materials and really wanted to own Telecom and Utilities.  The straightforward interpretation (which I think is also the correct one) is that this is simply a reversal of behavior over the prior two months.  During October-November Materials were up by about 17%–in an S&P up 11%–and Telecom and Utilities trailed badly (both up 4% or so).

One may be tempted to read the S&P’s focus on domestically-oriented industries as a function of increasing investor fears about Europe.  I don’t think that’s right.  Staples, perhaps the most EU-centric sector, was very strong in December. And despite the hysteria in the media, equity returns for the quarter in sectors sensitive to world economic growth were exceptionally good, both in an absolute and a relative sense.

My model portfolio?  …a few basis points of loss, due to the underperformance of IT.

More tomorrow.

December 2, 2011

an amusement park ride

During November Wall Street was like one of those giant rollercoasters you see at most amusement parks–all twists and turns, thrills and chills, and at the end of the ride you’re deposited at the same spot where you got on.  The only differences are that:  Wall Street gives us the experience for free, and we don’t enjoy it.

The same analysis can be made for 2011 as a whole, so far.  The year started off with a 9% rise, followed by a 20% fall ( from May-October–arguably an entire bear market compressed into an atypically short time frame), followed by a 14% upward bounce back to around flat–where we are currently.

Had the month of November ended a day earlier, it’s not clear whether anyone would have taken this “no harm, no foul” approach to analyzing 2011’s stock market gyrations, though.

November 30th was an extraordinarily strong day.  Look at two sets of numbers below.  The first is S&P performance by sector in November through the 29th, followed by performance for  the full month.  The numbers break out as follows:

through November 29th

Staples          +.04%

Utilities          -2.2%

Telecom          -2.4%

Healthcare          -2.9%

Energy          -3.6%

Consumer discretionary          -3.9%     +

Industrials          -4.3%

S&P 500          -4.6%

IT          -5.6%     +

Materials          -5.7%

Financials          -10.9%.

For the month through November 30th, US stock market performance by sector looks like this:

Staples          +2.4%

Energy          +1.7%

Telecom          +.8%

Healthcare          +.7%

Industrials          +.6%

Utilities          +.5%

Materials          -.1%

S&P 500          -.5%

Consumer discretionary             -.9%

IT          -1.9%

Financials          -5.0%.

What a difference!

Stocks rallied sharply on November 30th on three ideas, in my view:

–the EU is finally going to take concrete action to address its financial crisis,

–China is shifting away from a restrictive money policy,

–a continuing string of stronger-than-expected economic signs in the US means the economy is getting better, faster.

shifts in ranks

The one-day surge of 4.3% in the S&P was enough to drop Utilities by 4 spots in the monthly rankings.  It also raised Energy by 3 places and Materials and Consumer discretionary by 2 each.

Financials and Materials, the two worst sectors year to date, were the best two on November 30th; Staples and Utilities were the worst on the day, but remain the two best performers for 2011 to date.  This sort of reversal is to be expected during a buying surge.  The more interesting moves were by Energy and Industrials, which were the only other two sectors to outperform on the 30th.

What to make out of this?

I don’t think anything is really conclusive.  I have two reactions, though.

–if we push day to day volatility to the side, the S&P had been going up for about a month, until an avalanche of selling (out of the EU, I think) halted its progress.  Investors have been waiting for a sign that this selling has been exhausted.

–it seems to me that at the same time the market has been rotating away from secular growth names toward more business cycle-sensitive areas.  This is partly due to valuation, but also partly to expression of the idea that the next major development in world economies will be that news is surprisingly good, not bad.  At the very least, the market seems to me to be saying that there’s no longer any money to be made by betting that things will get worse.  That’s what I think the significance of the performance of Energy and Industrials is.

I think most of this optimism comes from the US economy, which seems to be healing itself despite the lack of help from Washington.

The reversal of money policy in emerging markets like China and Brazil from contractionary to expansionary is also a classic bullish sign.

And the EU seems finally to be starting to do enough to address its financial crisis that investors can convince themselves that, while Europe may not pull its own economic weight for a long time, at least its difficulties won’t undermine the rest of the world.

how am I responding? 

For now, I’m sticking with the sectoral portfolio structure I have, overweight IT and Consumer discretionary.  Within that structure, I’m trying to shift a bit away from secular growth names to somewhat larger and more mature firms that stand to benefit from stronger and more widespread economic growth.

The model portfolio’s performance?  It lost a few basis point.  Like the gains from October, there’s nothing much to write about.  I continue to be overweight IT and Consumer discretionary.

November 2, 2011

October strength

Despite receiving the trick of a 2.5% decline on Halloween instead of a treat, October was an unusually gratifiying month for stock prices.  True, the start was rocky, with the S&P 500 breaking through the 1100 support line intraday on October 4th before rallying to close at 1124.  But, again intraday, the market darted briefly above 1292 on October 27th–before weakening to close the month at 1253.

Reasons for the strength?  Although in now appears to have been at least a bit premature, the main driver was investor belief that the EU had finally taken decisive action to solve its debt crisis.  In addition, macroeconomic indicators and reports by publicly traded companies about their September quarter results both indicate that the world is is better shape than the consensus had thought.  Not only are corporate profits better than anticipated, but the US economy seems to be gradually pulling itself out of its mid-year stall.

sectoral breakout

The sectoral breakout of October S&P 500 returns is as follows:

Materials          +17.6%

Energy          +17.0%

Financials          +14.2%

Industrials          +13.9%

Consumer discretionary          +11.8%          +

IT          +11.5%          +

S&P 500          +10.8%

Healthcare          +5.6%

Staples          +4.3%

Utilities          +3.5%

Telecom          +1.8%.

Several things strike me about the list:

–the very wide spread between outperforming and underperforming sectors,

–the message of belief in a general economic upturn implied by the sectoral performance, and

–the contrast between this month’s performance and the year to date, the latter showing an extreme defensive bent.  I’m not going to list them all, but the best sectors ytd, even after October, are:  Utilities (+11.0%) and Healthcare (+6.5%).  The worst are:  Financials (-15.5%) and Materials (-9.4%).  The S&P itself is -0.35%.

model portfolio

The model portfolio, which I reinstated at the beginning of last month by overweighting Consumer discretionary and IT, outperformed a tiny bit during October, thanks mostly to performance on Halloween.  Not worth bothering even to add up the few basis points, however.

I think the markets will be flattish for a while yet, so I’m keeping the same overweights.  The idea is that these two sectors stand to benefit from mild economic strength.

what I’m doing now

I have taken one new step in my personal portfolio, however.  I’ve reduced the size of my largest positions.  I’ve already had an unpleasant surprise in the results from DeNA in Japan (I’ve shifted money away from DeNA toward Gree because of this).

I don’t expect horrible trouble with the stocks I own.  I just think they’re not all the one-way streets they’ve been since early 2009, even if the Greece situation turns out ok.  So although I continue to have large sector exposure, I’m toning down my stock-specific risk.

The elephant in the room is Greece.  I don’t know yet what the upcoming referendum is all about.  Is it a way for PM Papandreou to keep himself in office? (in which case I’m not too concerned)   Or is it that he believes that as it stands now Greek citizens won’t abide by the austerity measures the Greek government has agreed to? (in which case, we all should be worried).

The real issue isn’t the economy of Greece or its sovereign debt, of course.  It’s the European banks and the amount of the credit default swaps they may have to pay off on if Greece defaults.  The world really doesn’t want to know how many other Jon Corzines there are out there.

My current thinking is that a Greek default won’t happen and that, even if it does, it won’t be another Lehman-like catastrophe.  But no one knows.  And there stands to be at least be a period of really ugly trading in financial markets if Greece does default.

I regard my main job as gathering enough information to make my typical optimistic spin into an informed decision.  I’m doing nothing too defensive yet, but I’ve also got to be planning precisely what my defensive strategy should be.

More on that, and MF Global, in the coming days.

October 2, 2011

A tough month to end a brutal quarter.  The S&P 500 fell 7% during September and lost 13.9% for the last three months.  What’s notable about both periods is not only the extent of the declines, but also the sharply defensive rotation among sectors.  The performance breakout of the index during September is as follows:

Utilities          -.1%

Telecom          -1.3%

IT          -3.4%

Staples          -3.7%

Healthcare            -4.7%

Consumer Discretionary          -7.0%

S&P 500          -7.0%

Industrials          -9.4%

Financials           -11.6%

Energy          -12.6%

Materials          -16.6%.

For the full September quarter, the sectors played out as follows:

Utilities          -.4%

Staples          -4.9%

IT          -8.0%

Telecom          -9.2%

Healthcare          -10.5%

Consumer Discretionary          -13.3%

S&P 500          -14.3%

Energy          -20.9%

Industrials          -21.5%

Financials          -23.1%

Materials          -25.0%.

Two aspects of the three month view jump out at me.

The first is how tightly grouped the four worst sectors–all among the most highly economically sensitive ones–are in their underperformance.  This suggests to me that the current selling isn’t expressing anything particularly complex or difficult to understand.  It’s all fear of a weakening world economy.

Also, there are two outlier industries.  IT is performing unusually well.  This, I think, has to do with recognition of the profit potential inherent in the structural change–high-speed mobile, tablets, cloud computing–now occurring in technology.  In contrast, financials have almost continuously been among the worst performers.  Two reasons:  fallout from the role of financials in creating the 2007-09 crisis, and possible exposure to the ongoing fiscal troubles in the EU caused by Greece.

Where to from here?

As I’ve written elsewhere, I think the current weakness is caused by dreams of a quick resolution to global economic problems confronting the reality that the cost of repair is going to be slow growth for an extended period of time.  That is, I don’t think the selloff is the first stage of a cyclical bear market caused by impending recession.

Of course, if we have another month like September, this may be a distinction without a difference in terms of market level.

Even if so, there is a distinction to be made in terms of time.  If I’m correct that what we’re experiencing is a one-time downward adjustment to slower growth over the next few years, the market will settle out in short order and fear will quickly dissipate.  The recent pattern of wide performance difference between defensives and economically sensitives will end, as well–meaning that picking well-managed companies with bright futures will be profitable again.

On the other hand, if this is the first stage of a bear market, chances are that the current period of indifference to long-term fundamentals of individual stocks could last well into the first half of next year.  Market levels may not  decline much from here, but stocks could drift without much direction for a longer period than I now expect.

I’m going to change the model portfolio away from neutral.  I want to overweight Consumer Discretionary and IT.

September 1, 2011

Day five without water, internet or television—and for many of my neighbors without electric power. A bad end to a very strange month.

August debuted to the the tail end of an embarrassing, dismaying (and, as it turns out, consumer-confidence-shattering) display of partisan bickering in Washington over the debt ceiling. Then came the S&P downgrade of US government debt, deep panic in Europe over failure of leaders there to address the crisis in Greece, and further evidence of a slowdown in growth in the developed world.

Needless to say, it was a down month for the S&P 500. The final tally, by sector, is as follows:

Utilities +1.7%

Staples +.4%

Telecom -1.4% (the decline due to T’s fall on the final day of the month)

Healthcare -2.4%

Consumer Discretionary -5.5%

S&P 500 -5.7%

IT -6.2%

Industrials -6.8%

Materials -6.9%

Financials -9.7%

Energy -10.0%.

My first reaction to the figures is that this is the classic shape of a down-market month. The market as a whole loses a significant amount, but the pain is felt mainly in the economically sensitive industries. In fact, one interesting aspect of August is that the month’s losses are almost entirely in the cyclicals. The defensive industries are barely changed in price.

But the month-end numbers aren’t the whole story of August—not by a long shot. The index plunged during the initial trading sessions of the month, halting just above the 1100 line. Twice, the index rallied a bit and weakened again toward 1100 before spurting up above the 1200 mark as the month ended.

To appreciate the depth of the negative emotions being acted out during August, we have to look at the index at one of its low points. I’ve chosen August 22nd.  On that day, the month-to-date sector performances broke out as follows:

Utilities -3.1%

Staples -3.7%

Telecom -4.3%

Healthcare -9.2%

S&P 500 -13.2%

IT -13.7%

Consumer Discretionary -13.9%

Industrials -15.8%

Energy -17.1%

Financials -18.9%

Materials -22.2%

The order in which the sectors ended this period is almost the same as for the full month. But the numbers for the economically sensitive industries on the 22nd are really ugly. They’re almost an entire bear market for them in three weeks!

Also, look at the spread between the best and worst industries. For the full month, the difference is 10.7 percentage points. For the first three weeks, the difference is 18.1 percentage points, almost double the final result.

To my mind, all this is evidence of significant stress—stress of a type I don’t recall seeing since early 2009. It’s clearly a negative sign. The question is how one should interpret it.

My guess is that August’s price movement is a resetting of expectations for earnings growth in 2012 downward from the 10%-15% advance the consensus had expected. Three reasons:

–the current slowing down of the US and EU economies

–the national mood in the US toward government budget balance, even if this means removal of fiscal stimulus

–belief that Washington and Brussels can easily make the economic situation worse, but don’t have the skills or desire to make it better.

I don’t see the resetting as a prediction of a deep economic downturn but rather one of either very slow growth or stagnation. As an investor, this would be an acceptable outcome, since it would imply a sideways-moving market where I can make money by picking stocks. That’s what I’m planning for.

One other, technical analysis, point:

some market commentators are saying that the return late in the month to test the 1106 low made during the first week constitutes a “double bottom,” and evidence of a major change in market direction from down to up.

Maybe, but I don’t think so. Not enough time has passed from the initial low. I think we’re still trying to establish a floor for the market.

The model portfolio? I think I’ll remain neutral for another month.

July 31, 2011

This has been one peculiar month.

It began with a continuation of late June’s rocket-like ascent of the S&P 500.  That advance was sharp enough to send visions dancing through my head of the S&P beaching the 1350-50 ceiling that has kept the index in a trading range for the past half year.

The upward movement stalled, however.  The market sagged a bit.  But it began to perk up again when June-quarter corporate reporting season turned into a parade of bullish earnings statements–despite the fact that the latest GDP information shows the US economy to be barely keeping its head above water this year.

Then the debt ceiling debate broke out in Washington.  In response, the S&P began the downturn that, to me, looks as if it may have the index testing 1250 again.

The near-term worry is the possibility of a (very inconvenient) federal government shutdown sometime in August.  The more fundamental economic issue for the US is how it will transition from being the dominant super-power of the twentieth century (a result of having survived WW II with its industrial base intact) to being relevant in a current-century world order where China, India and Latin America are all credible economic rivals.  We know from history what happens if this process turns out badly–we become another UK or Japan, lost in dreams of past glory.

What we’re now seeing in graphic detail is how big of an impediment to that progress the current denizens of Washington, on both sides of the aisle, are.  You know there’s trouble when the Tea Party starts sounding like the adults in the room.

With all the day to day changes in sentiment, how did the S&P perform for the month?   …it lost 2.15% on a capital changes basis, lowering the year to date return to +2.75%.

On a sectoral basis, the month’s returns break out as follows (with model portfolio overweights indicated by + and ++):

IT          +1.6%          ++

Energy          +.6%          +

Utilities          -1.1%

Consumer Discretionary          -1.5%          +

Staples          -1.7%

S&P 500          -2.2%

Materials          -3.4%          +

Financials          -3.7%

Healthcare          -4.0%

Telecom          -6.7%

Industrials          -7.0%          +

If the market is “talking” to us through relative sectoral performance, what are its main messages?  (Remember, we can’t automatically assume the market is an accurate predictor of the future.  It can–and does–change its mind.)  My read:

–global growth strong enough to make Materials prices go up and demand for Industrial machinery soar isn’t on the cards

–the countercyclical rally in Healthcare and Telecom is over

–the global Consumer will continue to spend, even if the more highly cyclical business sector pulls the reins in

–Energy demand will stay strong

–the IT message isn’t obvious at the sector level.  We have to look at individual companies to see a pattern.  I think it’s that growth is mobile internet- and cloud computer-driven.  More mature technologies, particularly ones that depend on demand from government, are following the lead of the general Industrial sector.

The model portfolio? 

It gained something under 10 basis points vs. the market.  Doesn’t sound like much, but surprisingly good for an aggressively pro-cyclical portfolio during a down month.  IT was (for a change) the big positive, more than offsetting the damage done by the Industrial sector.


Yes.  For the first time in over two years, I don’t have any strong opinion about the general direction of the S&P over the next few months.  I continue to believe that world economies, including the US, are in better shape than GDP figures suggest.  But I think that the way events play out in Washington will exert an important influence on near-term stock prices.  And I have no idea what will happen there.  So I’m erasing all my overweights and becoming completely neutral.  I’m happy to sit on the sidelines and just watch for a while.

July 1, 2011

Six months in the books!

So far we’ve had:

earthquake and tsunamis in Japan that disrupted world industrial supply chains;

fighting in Libya that stopped the flow of the easy-to-refine crude oil that European refineries depend on;

riots in Greece as the EU struggled to get an agreement on refinancing Greek sovereign debt;

worldwide economic slowdown;

deadlock in Washington on upping the debt ceiling, raising the possibility of default on Treasuries.

S&P performance for the first half…

Despite all this bad news and uncertainty, the S&P gained 5% for the six months on a capital changes basis, 6% on a total return basis.

S&P sectors performed as follows for the half-year (overweights in the model portfolio are indicated by + and ++):

Healthcare          +12.7%

Energy          +10.4%          +

Consumer discretionary          +7.6%          +

Industrials          +6.9%          +

Utilities          +6.7%

Staples          +6.3%

S&P 500          +5.0%

Telecom          +4.4%

Materials          +2.6%          +

IT          +1.6%          ++

Financials          -3.7%.

So much for easy patterns.  Both winners and losers are a mix of both highly economically sensitive and slow-but-steady defensive areas.

A couple of things jump out at me, though:  how poorly Financials and IT have performed, and that its surge over the past few months has placed Healthcare in the top spot, year to date, with a 7.7% relative gain over the market.

…and for June

For the month of June, the sectors fall out as follows:

Consumer discretionary         -.3%          +

Materials          -.5%          +

Utilities          -.5%

Industrials          -.8%          +

Healthcare          -1.3%

Telecom          -1.5%

S&P 500          -1.8%

Energy          -1.9%           +

IT          -2.6%           +

Staples          -2.9%

Financials          -2.9%.

On the surface, the June results are even more of a puzzle.  But June was a month of two halves–a bearish one early on where defensive sectors were stars, followed by a recovery of economically sensitive shares in the second half of the month.

Where to from here?

Earnings season starts again this month.  A few weeks ago I thought that results would be strong, but that company guidance would be at best so-so, given the negative effects of the earthquake/tsunamis in Japan rippling through the world and the general slowdown that the economies of the industrialized world seem to be undergoing.  In recent days, there are some signs of revival, however.  So guidance may not be as lackluster as I’ve been supposing.

Still, I don’t see any percentage for a CEO in saying he’s super-bullish, even if he is.  So I suspect that the S&P will remain in its current trading range of 1250 – 1350ish until we’re closer to the start of fall.  I’m also guessing that the market will test the upper limit of this range before probing for the low end–if it ever gets to trying the latter.  While I already have sold covered calls on a tiny amount of my position (something I’m content to do as an individual, but would never have done as a professional), I continue to maintain an pro-cyclical stance in my portfolio.

The model portfolio?  It gained a few basis points against the index for June, something I wouldn’t have expected two weeks ago.  For the first half as a whole, it remains the slightest bit higher than the S&P, with the miserable performance of the IT sector being the main deterrent to a better outcome.

No changes.

June 2, 2011

On the surface, June looks like a “ho-hum” month, with the S&P posting a mild 1.2% decline.  Not unexpected, following a January-April period that saw the S&P 500 gain more than 8%.

sharp sectoral rotation

Peek under the hood even a tiny bit, however, and the facts are  anything but.  A very clear rotation toward defensive laggards shows itself, as you can see from the following sector returns (as usual, all model portfolio overweights are marked by + and double overweights by ++):

Staples          +2.4%

Healthcare          +2.2%

Telecom          +1.6%

Utilities          +1.6%

Consumer discretionary          -.5%

S&P 500          -1.4%

IT          -1.8%

Materials          -2.9%

Industrials          -3.0%

Financials          -3.4%

Energy          -4.6%.

In a pattern we haven’t seen before during the bull market that started over two years ago, every defensive sector outperformed the index by a minimum of 300 basis points.  The economically sensitive sectors didn’t exactly get clobbered (the S&P was saving up a lot of that for yesterday, June 1st) but they all underperformed, except for the least cyclical of the bunch, Consumer Discretionary, which eked out a 90 bp relative gain.  The closer the sector was to representing global GDP growth power, the worse it did.

what, if anything, does this mean?

The numbers are easy enough to lay out in a table.  The real question is what to make of them–and whether to alter portfolio strategy as a result.

There are three straightforward interpretations of the data:

–One is that what we’re seeing is the normal two-steps-forward-one-step-backward motion of the market.  Laggards are having a temporary day in the sun, based on their low relative valuation vs. economically sensitive market leaders.  If we’re in this camp, we might ascribe recent signs of a flagging US economy to lagged supply chain-related effects of the March earthquake/tsunamis in Japan.  We might also say that pent-up demand is petering out and we’re settling in to a more sedate, but more sustainable, growth path domestically.

–A second is that the sharp sectoral contrasts are the first signs of a change in direction for US stocks–that the business cycle domestically has exhausted itself and we’re seeing the first act of a bear market that will play itself out over the coming nine-twelve months.

–The third is that the movement makes the most sense if we’re looking through the eyes of trading-oriented chart followers–market participants who pick stocks more by chart patterns than economic fundamentals–have decided that this summer will follow the pattern of last year’s (a 10%+ decline, followed by sideways movement until September).  If so, recent softer economic numbers have been the trigger for the market rotation we’re seeing, not the cause.

I find myself torn

Just a few days ago, I wrote that I thought this year’s “sell in May and go away” summer doldrums would be milder than those of 2011, when some investors seemed to fear that the US would fall back into recession.  I was encouraged by the fact that the market was shrugging off economic indicators suggesting a slowdown in growth, and that we’d gotten through most of May without a repeat of the sharp decline that that month brought in 2011.

So the May sectoral results surprise me.  On the other hand, I think the market is at a critical juncture in technical terms.  In my view, we either hold around here, or the next stop is the 1260-1270 area on the S&P.  That would represent a 9% correction from recent highs, with defensive sectors continuing to outperform and economically sensitive ones picking up the rear.  The next few days will likely give important new information.

At this point, though, I can’t bring myself to believe that the business cycle has played itself out.  If we’re in the process of resetting the market at a lower level, the only fundamental reason I can come up with is that investors around the world are viewing Washington’s increasing dysfunction as actively and permanently damaging the country’s economic prospects.

watching and waiting

Anyway, for now, I’m content to watch and wait.  I’m not making any portfolio changes.

The model portfolio in May?  It underperformed across the board, by a total of about 15 bp.  That’s enough to wipe out all the modest gains it made from January through April.  ..oh, well.  No one said you can have ice cream for every course of the meal.

May 1, 2011

April produced three important stock market developments, in my opinion:

1.  Reports are showing that the economic consequences of the earthquake in Japan in March are playing out pretty much as I had sketched out in my March 20th post     …for most industries, financial markets initially overestimated the extent of supply disruptions, the two exceptions being autos and TEPCO’s delivery of electricity to the affected region.

2.  US-listed companies continue to report positive earnings surprises, based by and large on their non-US operations, two years after the stock market low in March 2009.  This is very unusual–and indicates either the strength of the global economy or the weakness of the current crop of brokerage house securities analysts.  Normally analysts become tired of missing results on the low side and add progressively more “padding” to their estimates.  As a result, it becomes progressively harder for companies to deliver positive earnings surprises.  But global firms continue to do so.  That’s very bullish.

3.  S&P entered the political debate about the US government budget deficit.  On April 18th, the rating agency announced it might be forced to downgrade its credit rating on Treasury bonds if Washington doesn’t take swift corrective action.  Combined with the flow of positive investment news on Japan, I think the S&P press release marks the close of the period of Wall Street worry about TEPCO.  Like a notice from the credit card company that you’ve exceeded your card’s borrowing limit, I think the S&P announcement gave the deterioration of government finances a much higher degree of reality–and urgency–in the mind of investors than it previously has had.  The deficit is now a (maybe the) front-burner worry.

As a result of #3, I think we should look both at the month as a whole and at the period after the S&P announcement to see any differences in trading patterns.

Looking at the full month first, the sectoral performance of the S&P 500 played out as follows (with, as usual, the overweights in the model portfolio indicated by + and ++):

Healthcare     +6.4%

Staples     +5.1%

Consumer discretionary    +3.9%          +

Utilities     +3.8%

IT     +2.9%          ++

S&P 500     2.9%

Industrials     +2.7%          +

Materials     +2.1%          +

Energy     +1.5%           +

Telecom     +.7%

Financials     -.1%

Compare these figures with the post-S&P announcement market, from the close on April 18th to the end of the month:

Energy     +6.0%           +

Industrials     +5.4%          +

IT     +5.3%          ++

Materials     +5.2%          +

Healthcare     +5.1%

S&P 500     +4.5%

Consumer discretionary     +4.3%          +

Utilities     +4.0%

Financials     +2.9%

Telecom     +2.8%

Staples     +2.5%

The differences?

–the constants are IT and Healthcare as outperformers, Telecom and Finance as underperformers,

–Energy, Materials and Industrials, all global industries, shift from negative relative performers to positive,

–Consumer Discretionary and Utilities, both domestic-oriented industries, shift from relative gainers to relative losers.

In addition, the US$ weakened significantly.

To be honest, I’d expected a market reaction to S&P but–as I wrote on April 19th–I wasn’t sure what kind.  The shift in where Wall Street is putting its money seems to be saying investors think Washington will do something about the deficit.  It won’t be enough to fix the debt problem, hence the currency decline and the outperformance of companies with significant non-US exposure, but it will be enough to avoid a full-blown debt crisis–hence the market rise.

This sounds plausible, if a little on the optimistic side.  And it’s probably enough for the moment to structure a portfolio by.  It’s important to remember, though, that this is only Wall Street’s best guess about what will happen, not a guarantee that this benign outcome will come to pass.  So we’ve got to be alert for changes to the situation.

The model portfolio?  …it ended the month losing a few basis points to the index.  It was more than 10 bp behind the benchmark during the defensive/domestic-oriented trading of the pre-S&P announcement market, but made up most of the loss in post-S&P trading.

While I’m worried because I think that what Washington does about the deficit will be an important determinant of future market performance, and I note that the S&P has decisively broken through resistance at 1330-1340–therefore, stocks may be a little on the pricey side–I’m not going to alter my pro-cyclical stance.  No changes.


April 1, 2011

I’m back from spring training.  The Devils aren’t going to make the NHL playoffs; the Eagles and Bulldogs (3rd and 1st seeds, respectively) have both been upset and knocked out of the NCAA hockey championships; the Giants and Tim Lincecum have already lost to the Dodgers.

That bad news out of the way, the S&P 500 has proved surprisingly resilient during a tumultuous month of March.  The market has shrugged off the continuing fighting in Libya.  Conflict there has shrunk the supply of easy-to-refine crude oil used in refineries in southern Europe, sparking France’s call for UN/NATO intervention into the struggle to overthrow Muammar Gaddafi.

The failure of fix nuclear reactors owned by Tokyo Electric Power in Fukushima after the devastating earthquake and tsunamis offshore Japan initially caused the S&P to break down below 1300 and touch 1250.  But the index has rebounded very sharply to end March at 1325.9, or down a mere 11 basis points on the month.

Two factors appear to me to be behind this bullish market tone:  the continuing steady accumulation of data that show the US economy is recovering, and the resulting heightened awareness on the part of (mostly individual) investors that they own too many bonds and not enough stocks.

The performance of the S&P sectors for March, with as usual overweights in the model portfolio indicated by + and ++, was as follows:

Telecom     +5.2%

Industrials     +1.7%          +

Healthcare     +1.7%

Materials     +1.7%          +

Energy          +1.5%          +

Staples     +1.1%

S&P 500     -.1%

Consumer discretionary     -.6%          +

Utilities     -.2%

IT     -2.7%          ++

Financials          -2.7%.

Taking a slightly longer view, the March 2011 quarter as a whole, sectors performed in this order:

Energy     +16.3%          +

Industrials     +8.2%          +

S&P 500     +5.4%

Healthcare     +5.0%

Consumer discretionary     +4.4%          +

Materials     +4.1%          +

Telecom     +3.5%

IT     +3.2%          ++

Financials     +2.8%

Staples     +1.7%

Utilities     +1.6%.

My observations:

1.  On a three month view, overweighting Energy was the key to success.  Almost nothing else would have mattered, although you wouldn’t have helped yourself by having lots of defensive stocks, like Utilities or Staples.  Periods like this, where index performance is dominated by one sector, aren’t that unusual (think: Financials from 2004-07 or IT stocks from 1998-1999).  I’m not willing to put more eggs in the Energy basket, because I see opportunities elsewhere in the market, but I don’t think Energy’s day in the sun is anywhere close to over.

2.  As has been the case since the bull market began in March 2009, technicals have been as good a guide to the market as anything else.  The market corrected by about 7% in February-March and bounced off support at 1250.  The most surprising development, in my mind, is how quickly and decisively the market has rebounded above 1300–a level where I thought the advance would face some resistance.

3.  I think it will be important to divide March into pre- and post-Fukushima to get a better grasp on the leadership during the rebound.  At the very least, this will reveal what other investors are thinking.  I’ll be posting on this topic in the next couple of days.

4.  Before having done the analysis, my impression is that the US market’s reaction to Fukushima and possible disruption to industrial supply chains that have Japan as key links has so far been highly emotional and pretty superficial.  My bias is to attribute this to the dearth of experienced securities analysts on Wall Street. The numbers will tell whether this is right or not.

5. My primary belief is that politics may make for entertaining conversation, but it rarely has important investment implications.  Actually shutting down the government during the current Federal budget dispute in Congress might have short-term negative for securities markets, however.  And the investigation that’s beginning about the Obama administration shutdown of the proposed Yucca Mountain nuclear waste storage site as a political favor to help Harry Reid be re-elected may also have unanticipated consequences in a post-Fukushima world.  I don’t see either as any reason to alter basic portfolio composition, however.

6.  To some extent, we’re in the same situation as we were six or eight weeks ago–with the market discounting most of the good news that’s likely to develop during 2011.  The biggest difference is that we’re that much closer to the Jule-July period when investors’ thoughts will begin to turn to 2012.  I don’t think there’s any reason to change from a a pro-cyclical portfolio posture, but there’s no reason, in my view, to make a very aggressive bet that the market will continue the sharp upward course it has been on the past couple of weeks.

the model portfolio

The portfolio lost 6 basis points to the index in March.  Energy, Materials and Industrials were all plusses, but were offset by the large overweight in IT.

For the March quarter, the portfolio gained about 40 bp.

No changes.

March 4, 2011

Go, NJ Devils!!

February was another strong month for the S&P 500, which tacked on a 3.2% gain to the 1.4% advance posted in January.  Sources of the optimism?  Despite gruesome weather–floods or deep snow–in many of the most highly populated areas of the country, consumer spending in the United States continues to recover.  The Fed now thinks the economy is on a self-sustaining upward path.  Job creation, mostly by small- and medium-sized businesses, is expanding to the degree that it now seems  strong enough to make a dent in the sky-high unemployment rate.

The Facebook/Twitter revolution has spread to Libya, after effecting a change of government in Egypt.  Investor worries about Middle East turmoil have shifted from concern that unrest in Egypt would spill over into oil producing countries to concerns about the impact of the loss of the extra-high quality crude that Libya sells to the rest of the world will have on prices (see my post on this subject). In hindsight, it might have been better for the country if, instead of invading Iraq and Afghanistan with Powerpoint generals whose skills seem to run more toward bureaucratic infighting than combat leadership, G W Bush had put Mark Zuckerberg in charge.

Fears about Libya knocked the index back from the 1340+ level it had attained two-thirds of the way through the month.  But the S&P has proved (so far) surprisingly resilient, bouncing back up from around 1300 three times since then.

Still, as you’ll see below, the sector performance of the S&P 500 during the month was a bit peculiar.  Only Energy and Consumer Discretionary outperformed the benchmark.  The returns themselves, with the model portfolio overweights marked, as usual, with + and ++, are as follows:

Energy          +6.7%          +

Consumer Discretionary        +5.8%          +

S&P 500          +3.2%

Healthcare          +2.8%

Financials          +2.8%

Materials          +2.5%          +

Staples          +2.4%

Telecom          +2.3%          ++

Industrials          +2.0%

IT          +1.8%          ++

Utilities          +.8%

Year to date, only Energy (+14.6%), IT (+6.0%) and Financials (+5.6%) have outperformed the S&P’s 5.5% gain.

The model portfolio eked out a (very) small relative gain of about 5 basis points for the month.  The overweights in Energy and Consumer Discretionary offset relative losses that came from IT, Industrials and–to a lesser extent–Materials.

No changes.

I’ll have more to say about the present condition of the stock market when I update Current Market Tactics on Sunday.  But I think we’re at an interesting juncture.

For now, I’ll just comment that I’ve been expecting a modest pullback in the market for some time, solely because of the strong performance of the S&P since last September.  Egypt, and now Libya, have given investors all the excuse they’ve needed to start selling.  But any bearish sentiment has fizzled out pretty quickly–in a way I don’t think would have occurred last year.  What has changed?  My guess is it’s individual investor money returning from bonds and, to a lesser degree, from emerging markets.

February 3, 2011

Welcome to the Year of the Rabbit!!

January performance

You can detect in January’s price action the effect of profit-taking by taxable investors in shares of last year’s big winners (look at Consumer Discretionary names, for example).  A more striking aspect of the month, in my opinion, is that the S&P continued to build on the positive momentum we have seen since the end of last summer.

In fact, returns for the month would have been considerably higher, more on the order of +4% than the 1.4% actually posted, had it not been for worries about political developments in Egypt that emerged late in the month.

The sectoral returns for the S&P for January (with, as usual, my overweights marked by + and ++) are as follows:

Energy     +7.5%          +

Industrials     +4.3%          +

IT     +4.3%          ++

Financials     +2.8%

S&P 500     +1.4%

Utilities     +1.1%

Healthcare     +.4%

Materials     -.2%          +

Consumer Discretionary     -.7%          +

Staples     -.8%

Telecom     -3.9%

My model portfolio had a very good month, gaining about 30 basis points vs. the index.  Overweights in Energy, Industrials and IT all had positive influences on performance that far outdistanced the negative effect of the poor-performing Materials and Discretionary sectors.  I’m still happy with the structure I have, so  …no changes.

What about Egypt?

I don’t know much.  As a general principle, though, it’s important to be clear on whether you’re wearing your hat as a human being or your hat as an investor.  In the latter role, the key question to not get yourself sidetracked, but to focus only on what matters to the profits of the stocks you own.  A general answer is that in world economic terms–or even in terms of an emerging markets index–Egypt is too small to make any difference.

The only real issue I see is whether whatever happens in Egypt ends up diminishing the flow of oil from the Middle East to the rest of the world.  My guess is no.  I could hedge my bet a bit by buying an oil stock with minimal Middle Eastern exposure, but I’m not going to.  (My personal opinion is that none of the media or stock market commentators we are hearing have the slightest idea of what they’re talking about.  I also don’t get why the US winds up supporting police states.  But that’s me wearing my human being hat and isn’t relevant to investing.)

Where do stocks go from here?

I believe strongly that we’re still in a bull market.  I also think that this will be an average year, with the S&P 500 ending 2011 about 10% higher than when it opened January.  That implies that there’s less than 10% to go for between now and then.  So I can easily see stocks going down from today’s level before they resume their upward course. On the other hand, there is a large inflow of retail money now under way.  That may serve to make the upside greater than I think–and possibly temper any downside movement.

In either case, however, I think it will be more important to be in the right sectors, and to be holding growth stocks rather than value names, than it will be to be 100% correct on how much upside the index has from this point.

January 4, 2011

Happy New Year!!!

It’s hard to believe that another year has passed.  2010 certainly was a complex one in terms of market action, featuring a strong start for the S&P, a summer swoon and a significant rebound from September on.  We had (crazy) talk early in the year of V-shaped recovery (meaning an economy bounceback just as fast as the collapse of 2008-2009) with rampant inflation soon to f0llow.  Then we went through a phase where the worry du jour was deflation and economic stagnation.  We ended the year with somewhat more somber expectations for 2011 than we had in January, though a much more hopeful view than we had in the summer.

To me, December was a surprisingly strong month.  Yes, this is usually a good period for S&P returns.  But it is usually preceded by a selloff in October–which didn’t take place in 2009.  The monthly returns by sector (with my overweights marked by + and ++) are as follows:

Financials     +10.6%

Materials     +10.2%     +

Energy     +8.9%     +

Telecom     +7.6%

Industrials     +7.6%

S&P 500     +6.5%

IT     +5.2%     ++

Healthcare     +4.3%

Consumer discretionary     +4.0%     +

Staples     +3.8%

Utilities     +2.8%.

For the full year of 2010, the S&P ended at 1257.64, a 12.78% gain on a price changes basis.  Dividends added 2.28% to that, bringing the total return on the index for the twelve months to 15.06%.  An above average year, and more than the consensus would have expected even as fall began.  The sectoral breakout of returns on a price-changes basis is:

Consumer discretionary     +25.7%

Industrials     +23.9%

Materials     +19.9%

Energy     +17.9%

S&P 500     +12.8%

Telecom     +12.3%

Financials     +10.8%

Staples     +10.7%

IT     +9.1%

Utilities     +.9%

Healthcare     +.7%.

For the year, the sectors look to me to fall into three clusters:

–energy, materials, industrials and consumer discretionary were clear outperformers

–healthcare and utilities were significant laggards, and

–the remaining sectors were clustered around the index.

A professional would probably be less cavalier about calling IT, at +9.1%, “around” the index.   He/she might, in fact, regard the thought that IT might return less than the S&P as their biggest insight of the year.  But we have lives.  For you and me, I think the description is apt.

You should also note that the returns have the same general bullish cast they have had from March 2009, only not to the same sharp degree.

The hypothetical portfolio?  It gained a few basis points for December, with IT and Consumer Discretionary (ouch!) underperformance erasing most of the relative gains in the other overweight sectors.  For the year as a whole, the portfolio outperformed by about 40 basis points.  A gain, yes, but a bit less than half the relative performance gain during 2009.

I don’t see any reason to change weightings yet.

I’ll be filling out my picture for 2011 in detail over the next week or so.  In the meantime, my thumbnail sketch:

–build a portfolio anticipating a 10% up year, but thinking results may–like 2010–be a bit better than that

–figure the US will have positive surprises, emerging markets’ relative gains will slow, and worry about the EU

–remember that the current bull market will enter year three in about two months.  It’s not too soon to look for signs of decelerating economies (there are none that I see so far)–but way too soon to take any action

–the US market has already started to rotate away from value names toward growth ones.  This movement may be more significant for performance in 2011 than sectoral allocation.  In other words, you may have to take the risk of owning individual stocks this year to make big relative gains.  I’m not necessarily recommending that you do, but it’s possible that sectors will show little differentiation from each other and the S&P this year.

December 2, 2010

The San Francisco Giants are now the World Series champions, having defeated the favored Texas Rangers in five games!!!

The S&P 500 started out strongly inNovember but a late-month swoon, prompted at least in part by troubles in Euroland and worries about fighting between North and South Korea, pushed it slightly into the red.  That’s more than ok with many professional investors.  The S&P is still up 7.9% on a total return basis year to date.  So unless the relative movement of the individual index constituents in your portfolio has pushed you from outperforming to underperforming, you’re probably content to close the books on 2010 and enjoy the holidays.  Besides, the higher the market goes in 2010, the harder it will be to show positive performance in 2011.  And, of course, expectations were pretty low for investing profits in 2010 for most of the year so clients will likely very be happy with up 8%.

Despite the fact that the S&P lost ground in November, it wasn’t the aggressive sectors but the defensive sectors that took their lumps during the month.  This is the opposite of what one might expect, and is certainly a different pattern than we’ve been seeing for down months over the past year and a half.

Here are the sectors listed in order of their performance for November.  As usual, the sectors I’ve been overweight in the imaginary portfolio I’ve been running on this page are market by + for overweight and ++ for doubly overweight.

Energy     +5.1%          +

Consumer discretionary     +2.4%

Materials     +.9%          +

Industrials     +.8%          +

S&P 500     -.2%

Financials     -.9%

Staples     -1.4%

Telecom     -1.4%

IT     -1.8%     ++

Healthcare     -3.2%

Utilities     -3.6%.

It’s hard to know what to make of this pattern.  My guess is that the defensive sectors had a catch-up rally during the late summer and early fall, but that’s over so they’ve begun another period of underperformance until valuation differences cause another rally.

Ireland and the Koreas aside, the notable event during November for the stock market is the increasing heavy weight of evidence that the US economy is starting to expand at an increasing rate.  Leading indicators suggest that this rebound, driven by increasing consumer spending, will accelerate into 2011.

Let’s pretend that we have no fundamental information for a minute, and just look at the charts.  After surging to just under 1230 on November 5th, the S&P bounced back down almost immediately.   It looks like it is settling in at the 1175-1180, where it spent much of October.  The index has also had two impressive intraday rallies on the 29th and 30th that pushed the index back to 1180 despite what seems like early-day selling coming out of Europe.

This suggests that positive domestic earnings news is offsetting worries about European and Asian political troubles.  It’s too early to be sure that the 1175-80 line will hold, but my guess is that it will.

The hypothetical portfolio?  It gained about 10 basis points vs. the index for the month.  Overweights in energy, materials and industrials more than offset the negative effect of underperformance by IT.

I’m actually making a portfolio change this month.  In late summer of 2009, I removed the overweight I had in Consumer Discretionary.  Arguably my biggest mistake with the hypothetical portfolio to date.  My reasoning was that profit recovery would come first for business and only later for the consumer.  While this may be what actually occurred in the US economy, Consumer Discretionary has nevertheless been the shining star of Wall Street since my move.  The sector as a whole is in first place, up almost 21% year to date.  It has outdistanced the index by 15 percentage points, and the next closest sector, Industrials, by more than five.

Even though you’re supposed to buy low and sell high, I’m reinstating the overweight in consumer discretionary.  I’m doing this based on the idea that a resurgent consumer during the holiday season and into 2011 will drive even further outperformance.  On an emotional level, I don’t feel that good about this move.  Logically, though, I think I should make it.  Let’s see how it works out.

October 31, 2010

Happy Halloween!

Go, SF Giants!!

As Octobers go, this one was a very smooth ride.  Mutual funds were, as I’d expected, not the big sellers they usually are this time of year.  Corporate earnings reports have been salted, so far, with a few more earnings disappointments than has been the case in previous recovery quarters.  But beneficiaries of dollar weakness and those with exposure to emerging markets or the high-end consumer continue to surprise on the upside, even as the overall US economy’s expansion remained at a sub-par 2% rate.

This mix produced a gain of 3.7% for the S%P 500 of 3.7%–3.8% on a total return basis (i.e., including dividends).  Year to date, the index has gained 6.1%–7.8% on a total return basis–making 2010 look more and more like a statistically “normal” year, despite the sometimes violent ebb and flow of investor sentiment since January.

On a sector basis, October was a typical bullish month for this recovery, with aggressive sectors outperforming and defensive ones lagging.  The results break out (capital changes, not total returns) as follows (with overweightings in the hypothetical portfolio marked by + and ++):

Materials     +6.6%     +

IT     +6.5%     ++

Energy     +5.6%     +

Consumer discretionary     +5.5%

S&P 500     +3.7%

Staples     +2.8%

Industrials     +2.6%     +

Healthcare     +2.1%

Financials     +1.4%

Utilities     +.9%

Telecom     -.1%

The hypothetical portfolio (meaning if you had 87.5% of your money in an S&P index fund or ETF and the rest in sector funds, 2.5% where each + is, above) gained about 20 basis points vs. the index for the month, pushing it squarely into the plus column for the year.  Industrials, which have ben market leaders in 2010, faltered a bit in October.  But the other overweight sectors, which have not made much of a positive contribution year to date, finally decided to add significant outperformance.

(Why 87.5%?  The portfolio started out at 85/15, but in the fall of last year I began to think the Consumer Discretionary sector had provided all the outperformance it was going to in an economy that would be marked by weak consumer spending.  So I removed the +–and left the portfolio at 87.5/12.5 since then.  This has been by far my biggest mistake of the past year. More about this in this year’s post-mortem analysis.  However, it’s interesting to note the consumer’s resilience in an economy with 9%+ unemployment. )

No changes for this month.

Where to from here?

Usually, the S&P rallies through yearend from the depressed level of mid-October caused by mutual fund selling.  But the selling didn’t occur this month.  Other taxable investors–corporate and individual–usually do their tax selling in November and December.  But this is typically not a defining characteristic of the period.  I hear a commentator from the Wall Street Journal saying a few days ago that mutual funds were saving up their selling of winners for their new tax year to begin on November 1st.  But if I’m correct–and I’m pretty sure I am–that funds have large realized loss carryforwards, that selling should have been done in October, to use the deductions in the earlier tax year, not held over into the new one.

By far, however, the most crucial task for an investor at this time of year is not to try to figure out the twists and turns of the market over the next few weeks, but to figure out how to position the portfolio for 2011.

I’ve already begun to write about this, under the heading of Strategy: Shaping a portfolio for 2011.  My thoughts, so far:

–I think next year will be another positive year.

–I’ve mentally pencilled in +10%, but that’s the kind of default number you put down when you have to say something and can’t think of anything better.

–In order by relative strength, world economies you can invest in will look a lot like 2010, that is:  the Pacific, the Americas, Europe.

–There’s no reason for the US$ to be particularly strong, but maybe all the bad news is already out on the table.

–The passage of time since the worst for world economies will likely give consumers in Asia and the Americas more confidence.  Government austerity programs in Europe may have the opposite effect.

–The consensus always underestimates the resiliency of the American consumer and the innovativeness/adaptability of US corporations.  The offsetting factor in the present instance is the depth of the damage done to the US economy over the past ten years by Washington and the big banks.  Gridlock would be the optimal result of the upcoming election, in the view of the consensus.  I agree.

For now–meaning until I get a better idea, I’m assuming that 2010 will end, and 2011 will begin, pretty much with things as they are now.  But stock markets are futures markets.  This is, they factor into today’s prices stuff that may happen three, or six, or twelve months from now.  As investors’ horizons extend more and more, the market becomes more susceptible to a change in the investment pecking order as investors begin to discount the next big economic change.

Suppose, for example–and this is purely (for now) just an example, world stock markets began to think that the US economy would being to perk up and Asia would begin to slow down.  They would likely reflect this view in a substantial reversal of winning and losing sectors.  The dollar might rise.  And money might start flowing back into the US market from abroad.

Stuff like this always happens.  That’s not the issue.  And it catches the consensus unaware every time.  The real questions investors have to work on are:  what the next big idea is; how to play it; and, if you can’t figure anything better out, how to defend/hedge yourself against it happening.

More on this in the coming weeks.

October 5, 2010

The S&P 500 rose by 8.8% on a capital changes basis (8.9% including dividends) in September.  According to people who look up these things, that makes it the best September in over seventy years.  The market also showed the pro-cyclical configuration of industry winners that has been missing from the S&P for a while.

The good month pushed the S&P back into the black, year to date, at +2.3%.

These strong gains come during a period of normal seasonal weakness.  I don’t think this fact means much, though.  I’ve suggested in other posts that the yearend mutual fund selling that usually dominates trading during the second half of September and the first two or three weeks of October would be a non-factor in 2010.  Why?  Accumulated realized losses are so large for the industry that no amount of selling winners will offset them and allow funds to make annual distributions.  So why bother.         So far, this idea is turning out to be right.

In my mind, three factors are behind the market rise:

–fears that the US economy will fall back into recession–never plausible, but then most fears aren’t–have receded,

–the dollar has fallen against the euro and the yen by about 10% over the summer.  This means the value in greenbacks of foreign earnings, which make up over half of the S&P’s total, has gone up.

–investors are beginning to factor into prices the possibility that 2011, which is right around the corner, mill be an up year for profits.

I think the second of these is the most important, although I perceive it to be the least talked about.

The sectoral returns for the S&P 500 for September (with the usual + and ++ for overweights in the hypothetical portfolio (no new name yet, sorry)) are as follows:

IT          +12.1%     ++

Industrials          +11.2%     +

Consumer Discretionary          +11.0%

Energy          +9.1%     +

Healthcare          +8.8%

S&P 500          +8.8%

Telecom          +7.9%

Materials          +7.5%     +

Financials          +6.0%

Staples          +5.4%

Utilities          +2.6%

The hypothetical portfolio, which will be happy to see the end of 2010, gained about 20 bp during September.  This brings it bak up to within a few basis points of even with the index, year to date.  I don’t see any reason to make changes.

Looking ahead, but only a bit, September-quarter earnings report season will soon be kicking off.  This one will likely display very good absolute numbers.  How it will sack up against analysts’ expectations is harder to call.  On the one hand, the dollar decline plus continuing robust growth in emerging markets will be positives.  On the other, analysts eventually catch on to the fact that the trend has changed for the better and get tired of missing reported results badly.  So they will tend to pad their estimates, raising the possibility that the positive earnings “surprise” factor this quarter won’t be that large.  Analysts can’t go too wild, however.  There are companies who’ll insist that analysts not deviate from published company guidance (which is considerably below what the firm hopes to achieve), on pain of loss of access to top management.

My guess is that, barring the unlikely event of surprisingly bad corporate earnings, the upcoming reports will help sort out winning and losing firms and sectors but have little overall effect on the market level.

Technically speaking, I think 1150 on the S&P 500 is the new 1100, an area of resistance that the market will struggle to break through on the upside.  1100 is the new 1050, an area of support.  Perhaps more importantly, I think that as investors gain more confidence that the global economy is healing itself, they will begin to release their death-grip on the charts and begin to look at earnings growth and PE levels more closely.  If that’s correct, the charts will gradually lose their power.

1200 by yearend?  Too low a target?

September 3, 2010

This is the start of year two for Keeping Score.  Happy Anniversary!

As I’ve mentioned in other posts, August is a peculiar month for stocks because its combination of industrial downtime, vacations and various festivals mean that around the world the most senior investment professionals–the ones who make the most important decisions–are away from their desks for most of the month.

Nevertheless. this year August had a distinctive tone to it.  Not only did defensive sectors continue the outperformance they showed in July, but Telecom and Utilities were up during a period when the S&P was down 4.8%.

the numbers

Sectoral returns for the month, with overweights in the hypothetical portfolio market by + and ++, are as follows:

Telecom     +2.3%

Utilities     +.9%

Staples     -1.6%

Healthcare     -1.8%

Materials     -2.9%     +

Consumer discretionary     -4.1%

Energy     -4.7%     +

S&P 500     -4.8%

IT     -7.2%     ++

Industrials     -7.3%     +

Financials     -7.9%


First of all if we try simply to describe what went on in August,  before attempting to decipher what the market is saying, I’ m left with three observations:

1.  Looking only at the chart of the S&P 500, the index reached around 1120 early in the month but couldn’t move higher.  Once that resistance was felt, stocks promptly moved south.  They spent the last few days of the month trying, equally unsuccessfully, to penetrate below 1040, before rebounding sharply during the opening two days of September.  Since the beginning of June, the index has been repeating this same general pattern.

2.  On a sectoral basis, the market is rotating toward Telecoms and Utilities, two former whipping boys of the first phase of the bull market.  The August figures alone don’t show this all that clearly, since one would expect defensives to outperform while the market is going down.  On a two month basis, though, the index is up 1.8%, while Utilities are up 8.3% and Telecoms up 10.4%.  The only other sector that can match this strength is Materials, which is up 9.0% for the two months.

The worst sectors on a two-month basis, and the only ones to lose money over the period, are Healthcare, Financials and IT.  Unlike the three star sectors, the clunkers all move vs. the market as one would expect.

interpretation needed

1.  Up until the past couple of months, this market has been a chart reader’s paradise.  No fundamentals needed, just follow the pattern of rising highs and rising lows.  At this point, however, I think that by choosing your points of reference you can “see” just about anything you want in the price movement patterns.

The pertinent market question is when we break out of the current trading range, do we break out to the upside or the downside.  The masters of this sort of voodoo say (I think) that if the tops are descending and the bottoms are relatively flat, then the breakout will be to the upside.  If the tops are flat, and the bottoms are rising, it’s the reverse.  All well and good.  But look at a chart of the S&P and tell me which is the case.  It all depends on what points you include or exclude from your chart lines.

2.  A related question.  Is the market rotating into Utilities and Telecoms, both defensive sectors, because they’re defensive or because they’ve barely moved since March 2009 and most of the rest of the market has skyrocketed.  In other words, is this movement based primarily on relative valuation.  Sure, there has to be a sense that the aggressive sectors have gone cold for the moment.  But is the main idea for professionals that they can pick up a little outperformance by playing a countertrend movement, or are they beginning to bet that the bull market party is over?  More important, if it’s the second, are they right?

my thoughts:  not much change from last month

It seems to me that the recovery from the global financial crisis has gone about as expected so far.  In contrast with the rebound from an inventory cycle downturn, where real GDP goes up 5%-7% for a quarter or two on pent-up demand before settling back to around 3% growth, we’ve had a crippling crisis, so we’ve had a couple of quarters of 4% before settling back to the hard work of eking out numbers above 2%.

I find it very hard to imagine that the US slips back into recession any time soon.  I find it even harder to imagine that the rest of the world–which is, as expected, doing a lot better than the US, and which accounts for half the revenues of the S&P 500–will do so, either.

My best guess is that S&P 500 earnings are up 10% next year, we’ve become reconciled by then to slowly rebuilding the US economy and the S&P is 20% higher than it is now.

What troubles me about this forecast is that it is so much more bullish than I perceive the consensus to be.

I have a second thought.  Maybe the next few years turn out to be a repeat of the second half of the Seventies.  That was a time when the index didn’t do much of anything but investors like Peter Lynch of the Fidelity Magellan Fund made a fortune.  Then the trends that moved stocks up were the move to the suburbs, the rise of specialty retail, disinflation.  Now the important themes may be the affluent consumer, the creative destruction caused by the Internet, companies with vibrant foreign businesses, dividend-paying stocks.If the latter idea turns out to be closer to the mark, it may take the extra effort of selecting individual stocks with good prospects–not just sectors–to beat the market handily.

I think a key factor supporting either of these scenarios is for the S&P to establish a base.  The next month or two will determine whether it will be at the 1040-1050 level or not.

Take a look at my post on market patterns in September-October.  My guess is that this month and next will be a stronger period than average.  More on this point.

the hypothetical portfolio

It gave back most (about 17 basis points) of July’s gains.  Energy was a neutral influence during the month.  Relative losses in Industrials offset relative gains in Materials.  IT did virtually all the net damage.

No changes.

August 1, 2010

What a difference a month can make!  July reversed all June’s losses and then some.  It was also a quite distinctive month, marked by a broad sectoral participation in the advance that has been very atypical of the market in the recovery from the lows of March 2009.  The S&P 500 index itself gained 6.9% for the month.  As you can see from the numbers below, seven of the ten S&P sectors beat the index.

Only one sector, healthcare, was a conspicuous laggard.  Even telecom and utilities, which have been outperforming in down months and underperforming in up ones, beat the index.  Consumer staples, which is contending with profit slowdown issues caused by the slump in the euro, and financials, which appear to have guessed incorrectly in their trading operations that the US economy would accelerate in the second quarter (and that therefore stocks would go up and bonds would go down), were the only other sectors to fall below the benchmark.

The July returns by sector for he S&P 500 are as follows (with overweight sectors in the hypothetical portfolio (a better name is in the works) indicated by + and  ++:

Materials          12.2%     +

Industrials          10.3%     +

Energy          8.0%     +

Telecom          7.9%

Consumer discretionary    7.7%

Utilities          7.4%

IT          7.2%     ++

S&P 500          6.9%

Financials          6.6%

Consumer staples          5.8%

Healthcare          1.3%.

Note how closely bunched most sectors are around the index.  Only Materials and Industrials on the upside and Healthcare on the downside are significantly away from the index.

What does this mean?  At the risk of forcing the data to say more than is warranted, I draw two conclusions.

First, stocks as an asset class went up in July, because the market regarded the S&P at around 1000 as being too cheap, even given downward revisions in consensus expectations for near-term growth in the US economy.

Second, two sectors stand out.  The market really likes Industrials (more than 9 percentage points better than the index so far this year) and dislikes Healthcare (more than seven percentage points below the index).  By and large, other outperforming sectors were playing catch-up last month.

The hypothetical portfolio gained a little more than 25 basis points vs. the index during July, half of that from the outperformance of the Industrial sector.  Again, no changes for August.

Where to from here?

Over the past several months I think Wall Street and other global investment centers have been trying to come to grips with two issues.  The economic recovery in the US is going to be far different from the inventory cycle pattern.  The latter typically has shown a quarter or two of 5%-6%-7% real growth, as consumers make purchases deferred during recession, before fading back to increases of 3%-4%.  In this recovery, we may already have seen the peak surge of “pent up” demand in overall growth of around 3% and are experiencing the fade back to 2%-2.5%.

Second, profits in the US stock market are no longer closely correlated with the domestic economy. For example, in the case of WYNN, which I wrote about on Friday, over 100% of earnings come from China.  US operations continue to make losses.  Because of this phenomenon, it seems to me that the US market can go up even if the US economy doesn’t follow suit.

Related to this second point, publicly listed corporations are making it clear that demand is not strong enough for them to expand capacity and hire more workers in the US.  But it is strong enough for them to restore salary and benefit cuts and maybe grant raises.  This implies that consumer spending, which makes up the bulk of the domestic economy, will rise–not because more people have some discretionary income, but because some people (read: the 90%+ of the workforce now employed) will have more income.

This is an unusual situation for the US and may present a serious social problem.  But–taking of my hat as a human being and putting on my hat as a portfolio manager–the stock market should still go up.

I don’t know how long the market will struggle with these issues.  The charts may tell us something, however.  We’re back at the magic 1100 mark.  If we can stay above it, I’d begin to believe that investors are reaching a bullish conclusion.  Personally, I think it’s not a matter of if, but of when.

July 3, 2010

Well, the best anyone can say about June is that at least it’s over.  Good riddance.

We’re at the halfway mark for the year and are down 6.7%, thanks to a 5.4% loss for the month that pushed the second quarter deeply into the red at minus 11.9%.

One way of looking at market developments during the year is to think that 2009’s dreams of a fast and painless bounceback from recession, unsullied by aftereffects of the housing crisis and the consequent damage to the word banking system, were shattered in the just-completed quarter by the harsh reality of the weakened 2010 consumer.

Yes, there may be some of that in today’s market.  An old Wall Street cliché is the mining company with no other assets that makes a major gold discovery.  The stock goes up every day until the mine opens, because speculators hatch increasingly more bullish stories about the mine’s ore quality and output potential.  Then reality intrudes as production begins.  No matter how good  the output, it can’t match the speculators’ anticipations and the stock falls.

Yes, it’s true that nothing is ever totally discounted until the event occurs.  But I don’t think this can be the whole story, though.  True, recovery in the US seems to be shifting into a lower gear.  But the path of the economy isn’t that different from expectations of three or six months ago.  Corporate profits have mostly been considerably better than analysts have anticipated, as well.

One candidate for what else may be going on is that there’s a new balance being set between the interests of short-term traders and long-term investors.  Taking the (considerable) risk of assuming something is different this time, it may be that in today’s market we have more short-term traders, who like and profit from, dramatic movements in the index, and fewer long-term investors, who in theory should be indifferent to short-term market movements but who in practice don’t like them.

Where would traditional active investors have gone?–to index funds, ETFs and, ironically, to hedge funds (who are like traditional active managers, except for having higher fees and lower returns).

This is material for a later post.  For now, let’s look at S&P performance for this month and year-to date.  The number (with the hypothetical portfolio overweights market by + and ++):

Telecom          -.4%

Utilities          -1%

Healthcare          -1.9%

Staples          2.8%

S&P 500           -5.4%

Energy          -5.8%           +

Financials          -6.0%

IT          -6.2%          ++

Industrials          -7.1%          +

Materials          -7.1%           +

Consumer Discretionary          -9.8%

Performance clearly ran along conceptual lines, with defensives as a group outperforming and economicially-sensitive underperforming.  Two items of note:  after a dreary relative fifteen months, defensives were a mile ahead of the index in June.  Also, consumer discretionary lagged the index, and the other aggressive categories, significantly.

For the quarter–I’m too lazy to list all the sector performances–the S&P was down 11.9%.  All sectors were down.  Utilities, Telecom and Staples significantly outperformed.   Consumer Discretionary inched ahead of the S&P; other sectors mildly underperformed, except for Materials, which fell 15.7% for the three months.

year-to-date figures

I find these numbers interesting.

Industrials          -2.0%           +

Consumer Disc.          -2.3%

Financials          -4.3%

Staples          -4.3%

S&P 500          -7.6%

Utilities          -9.2%

Healthcare          -9.8%

Telecom          -11.0%

IT          -11.0%          ++

Energy          -13.2%          +

Materials          -13.7%          +

What should we make out of this?  I don’t think there’s any definitive signal from the performance pattern, but three things stand out to me.  Global commodity industries, materials and Energy, are at the bottom of the pile.  One can think that speculators in the commodities underlying these industries are flattening out their books.  Whether this is in response to excessive risk-taking earlier in the year, or to genuine signs of economic slowdown worldwide remains to be seen.

Industrials, Consumer Discretionary and Staples, and Financials form a second grouping.  These stocks are substantially ahead of the index year-to-date.  Given that US-based Industrials make mostly products for consumers, the message from the index is that being linked to the US consumer is the best place to be.  That’s odd., since I would have thought a weak consumer in the US is among Wall Street’s biggest current worries.  This nexus bears close watching.

Everyone else, traditional defensives, Utilities, Telecom and Healthcare,  + IT, is  below the index but not by much.  This is also a curious group.  What jumps out to me is that on a six-month view there’s been no reason to buy defensives, despite the ugly market we’ve had recently.  IT has done poorly despite the rebound in corporate IT purchases now underway and the continuing success of smartphones.  Part of the underperformance is due to a sharp selloff of the sector in January.  Otherwise, the sector seems to be an aggregation of both big winners and big losers.

The hypothetical portfolio?  –another 15 basis point loss to the index, with all overweight sectors in the actively managed portion of the portfolio underperforming.

Where to from here?

From a technical point of view, it seems to me that the market is trying to settle itself into a trading range.  It has found a ceiling for itself at around 1100 on the S&P 500 and is now looking for a floor.  Prior to the recent signs of slower growth in the US, that would probably been around 1050-1060.  Now it may be 1000.  We’ll see in the next couple of weeks of trading.

Changes to the portfolio?  None.  Professional money managers are probably flattening their sector bets.  Depending on temperament, they may be upping their exposure to individual stocks vs. the index to keep the same general risk level (and potential for outperformance) or flattening their stock bets as well.  My experience is that doing this probably reduces the ultimate returns on the portfolio.  But it lowers volatility and minimizes second-guessing from institutional clients and/or their pension consultants.   So in a funny sense there’s a business reason for doing so.  But not one I care to employ.

May 30, 2010

As hazardous to equity investors’ wealth as May might have been—a loss of 8.2% on the S&P 500 apparently qualifying it as the worst May in seventy years (irrelevant, though useful cocktail party conversation)—at least it wasn’t dull.

Parts of downtown Bangkok burned.  The Koreas, North and South, threatened war.  As the Euro continued to sink, pundits planned euro/dollar parity celebrations.  Workers throughout Europe protested austerity measures proposed to help rescue the EU.  Then, of course, we had the “crash of 2:45,” or “flash crash” one day when one set of computers decided to sell and, detecting this, most buyers withdrew their bids—so the S&P dropped 5% and rebounded completely within a ten minute span.

On the brighter side,  iPads and smartphones are selling like crazy worldwide.  A welter of new corporate and government releases support the idea that a slow, but self-sustaining, economic advance has begun in the US.  And, toward the end of the month, signals began to emanate from China that contractionary economic policies are coming to an end there.

Form a technical point of view, I think we were due for a correction after the vigorous market advance that started in mid-February.  That’s just par for the course.  Three things make this one notable, to me anyway, among the bumps in the road we’ve encountered over the past 14 months:  its depth, its duration in time, and the suggestion toward the end of the month that hedge fund credit limits are being tightened (to me, the collapse in commodity prices and the end of month market gyrations smack of forced selling).

The break with the past pattern of declines makes the bottom harder to call.  I think it’s more important to note that many stocks are very attractively priced.  Europe-based international firms are the latest to be tossed into the bargain bin.

Turning to sector results for the month, every sector is in the minus column.  The pecking order is about what one would have expected, with defensive sectors at the top and aggressive ones at the bottom.  One exception: Consumer Discretionary outperformed.

The numbers, with hypothetical portfolio overweights marked by + or ++, are as follows:

Telecom          -3.9%

Staples          -4.7%

Utilities          -6.1%

Healthcare          -7.0%

Consumer Disc          -7.1%

S&P          -8.2%

IT          -8.3%     ++

Financials          -9.3%

Materials          -9.7%     +

Industrials          -9.8%     +

Energy          -11.8%     +

The hypothetical portfolio underperformed for the month by about 17 bp., dropping into the red versus the market, year to date, by about 20 bp.  C’est la vie.

As I’ve written elsewhere, I’m more bemused than frightened by recent market action, although I will admit to a few twinges in the pit of my stomach while looking at price action of the past week or so.  (Fear would actually be a good thing, since for me it’s usually an indicator that a downdraft is just about over.)  I’m convinced we’re still in a bull market.  So, no changes.

May 3, 2010

April was another positive month for the S&P 500.  The index gained 1.48% on a capital-changes basis.  The advance allowed the S&P to break through above the 1200 level, thereby restoring itself to the territory where it was trading at the time of the Lehman collapse in September 2008.

The market maintained the pro-cyclical bias it has had for more than a year.  The returns by sector, with overweights for the hypothetical portfolio indicated by + and ++, were as follows:

Consumer discretionary       +6.0%

Energy          +4.4%     +

Industrials          +4.1%     +

Utilities          +2.3%

IT          +1.8%     ++

S&P 500          +1.5%

Financials          +1.3%

Materials          +.4%     +

Telecom          -1.4%

Consumer staples          -1.6%

Healthcare          -3.9%

So far this year the sectors of the S&P have settled into three distinct groups.  The index is up 6.4% through the end of April.  Industrials and Consumer Discretionary, the clearest traditional beneficiaries of recovery in the US–and therefore the most aggressive bets for equity investors–have each risen by about 17%.   Healthcare, Telecom and Utilities, all defensive groups, are in the minus column.  The rest are clustered around +3%.

Domestic economic news continues to be good.  Profit growth for publicly-traded companies remains surprisingly strong.  Businesses are starting to rehire, so that they can keep up with expanding industrial demand.  The consumer is feeling more secure and is beginning to spend a bit more.  It’s becoming clearer to domestic economists, however, that the journey back to health for retail spending is going to take  another year at the very least.  I’ve held this view for a long time.  But, while correct, this insight hasn’t been of much use in the stock market, where consumer stocks have been rock stars.

The Greek crisis may be reaching its worst point.  Let’s hope, anyway.  It’s telling that troubles in Euroland have had very little impact on the US stock market.  The negative reaction to Greece has played out first and foremost in the price of Greek government bonds, and to a lesser degree in the price of the euro and EU stocks.  Arguably, the weakness last month in consumer staples stocks with significant European exposure is attributable to euro weakness.  But this is the way a bull market works–investors discount the positive news and ignore the rest.

The hypothetical portfolio?  It gained a little less than 15 basis points vs. the market for the month.  Strong gains in Energy and Industrials, plus more modest outperformance by IT, were tempered by weakness in Materials.

Changes?  None that I want to make.

Read tomorrow’s update of Current Market Tactics for more detailed thoughts on what I think the market is doing now.

April 4, 2010

March was a very strong month for the S&P 500 and brought the index into positive territory, year to date.  More significant, March marks a year of generally uptrending markets, interrupted only by mild corrections during June-July and January-February.

The index gained 5.88% during the month, with the pro-cyclical sectors, which we have become accustomed to seeing at the front of the pack, being there again.  The sectoral results for the S&P for the month (with overweight sectors in the hypothetical portfolio marked with + and ++) are as follows:

Industrials          +8.9%     +

Financials          +8.8%

Consumer disc          +7.7%

Materials          +7.6%      +

IT          +6.8%      ++

S&P 500          +5.9%

Telecom          +5.4%

Staples          +3.6%

Energy          +2.9%     +

Healthcare          +2.5%

Utilities          +2.4%

Unlike February, when some economic statistics began to cast doubt on the sustainability of recovery, March produced almost uniformly strong numbers despite disruptive weather in many highly populated areas of the US.

The hypothetical portfolio gained about 10 basis points versus the index.  Strength in Industrials, Materials and IT more than offset (continuing) weakness in Energy.  Again, the Consume Discretionary sector has been strong, despite continuing evidence that the current recovery is a tepid one.

I’ve given more thought to, and done more work on, the question of how long a pro-cyclical stance–which has been the key to success over the past year–will remain a viable strategy.  More on that in the revision to Current Market Tactics that I’ll post tomorrow.  For now, suffice it to say that I’m making no changes to the portfolio’s weightings.

March 1, 2010

Well, we made it through February.  The month didn’t seem like a whole lot of fun, though.

We started out, after a couple of days of stabilization, by dropping down the elevator shaft, breaking below 1050 on the S&P 500.  At the same time, worries intensified that the large amount of Greek government debt–plus the fact Athens supplied falsified national accounts to Brussels to make things look better than they were–would bring down the EU, in an encore of the Asian debt crisis of 13 years ago.

On top of all this, US unemployment claims began to rise again (maybe weather related, but a worry nonetheless).   And consumer confidence dropped sharply toward the end of the month.

If we had all this information on January 31st, how many of us would have guessed that the stock market would be up in February?  Probably not that many.  Yet, the S&P did post a gain of 2.9% for the shortest month of the year, and it displayed the bullish sector orientation that has been its hallmark for almost a year.

Here are the sector-by-sector results for February (with overweight sectors market by + or ++):

Consumer Disc.     +5.3%

Industrials              +4.6%    +

Materials                 +4.2%    +

IT                               +4.0%    ++

Financials              +3.4%

S&P 500                +2.9%

Cons.Staples          +2.7%

Energy                      +1.9%  +

Healthcare              0.0%

Telecom                  -1.3%

Utilities                   -1.9%

This is a very familiar table.  The economically sensitive stocks are at the top and the defensives are at the bottom.

You might observe that bounceback from the pummeling they received in January is part of the reason aggressive stocks are at the top of the list for February.  That’s a valid point.  But year-to-date (sorry, not listed), Industrials and Consumer  Discretionary are the strongest sectors, and (what’s new?) Telecom and Utilities are the weakest.

One might (actually, should) also observe that–again, year-to-date–consumer-related industries like Industrials (I know, but if you read the lines of business for these companies, they make lots of consumer stuff) Consumer Discretionary and Consumer Staples are the strongest, and IT is pretty close to the bottom of the pile.  What does this say for my contention that the economic recovery in the US will be led by industry and only followed with a lag by the consumer?  Not that much.  I’m not ready to change m mind, but my idea is clearly out of step with what everyone else is thinking.

The hypothetical portfolio?  It gained about 10 basis points for the month, partially reversing its losses of January.  No changes for March.

What’s my biggest worry right now?  I’ve got a little one and a big one.  The lesser concern is the weakness of the euro.  That’s good for European growth but bad for US companies with EU exposure.  In a real-life portfolio with individual stocks, I’d be shifting my holdings, particularly in consumer sectors, still keeping companies with non-US exposure but not those heavily dependent on earnings from Europe.

My bigger worry is a conceptual one.  In the stock market, nothing is forever.  Things that were true eventually become false–sometimes gradually, more often suddenly.  And the structure of the hypothetical portfolio has been right for almost a year.  While this doesn’t exactly mean the strategy is living on borrowed time, it will be at some point.  And I don’t have great conviction (yet, at any rate) about what the next big change will be.  Any ideas?

(By the way, the first modern thinker I’m aware of who made the concept that things change into their opposites the centerpiece of his reflections was Hegel, in the early nineteenth century.  He was followed by his disciple, Marx, through whose political writings the idea spread to large parts of the world.  Of course, there was also Schopenhauer, Freud…

George Soros, admittedly a master marketer, claimed, in a moment of stunning chutzpah, that the idea was his own invention in The Alchemy of Finance. This is a lot bigger whopper than Al Gore saying he invented the internet.   But no one in the investment community appears to have noticed.)

February 2, 2010

The S&P 500 opened 2010 the same way it closed 2009 (ignoring the last few hours of trading)–with surprising strength to the upside.  The good times lasted a little less than two weeks, until the index seemed to run into a brick wall at 1150.  After bouncing off that level a couple of times, the market reversed direction during the last third of the month, losing about 7% in value by the 29th.

What’s going on?

The market always moves in a two steps forward, one step backward rhythm.  We’ve had nothing but giant steps frontward since a correction in late June-early July.  So we were due for a counter-trend move downward.  Here it is.

How deep will the fall be?  How long will it last?  No one really knows.  We can’t gather our stocks together, give them a rousing pep talk and then expect them to reverse direction and start rising again.  We have to let the selling run its course. (As I’ve mentioned in Current Market Tactics, a period like this is usually an excellent chance to upgrade a portfolio.)

If I had to try to explain what’s happening, my guess would be that–thinking in the simplest possible terms–equity investors came into the year thinking that the S&P would end 2010 at a level of 1250 or so.  When the S&P reached 1150, that implied that new buyers could expect a gain of about 8% from holding stocks for a little less than a year.  This wasn’t enough reward to take the risk of buying, so the market couldn’t go up.  Given that it virtually never stands still, there was only one way it could go–down.

If the previous paragraph is correct, the market will settle in when there’s enough space between it and 1250 for investors to make a significant gain.  If “significant” is 20%, then the market will stabilize at around 1050.  If the number is 15%, then the index level is 1070.

I’ve been tempted to delete this section, but have decided to leave it in.  Whatever the details, my opinion is that what we’re in is just a correction in an ongoing upward market.  Our main concern as investors should not be with every twist and turn in the road–the 5%s and the 10%s–but with the longer-term picture–the 30%s and the 50%s.  The little moves just take too much time and effort.

The S&P 500 lost 3.7% for the month.  The general pattern in pullbacks like this is that the more aggressive stocks fall the most, defensive stocks the least.  Stellar performers in the up phase fall to earth the hardest, laggards (you can’t fall off the floor) the least.

Most sectors held true to form last month, during a time when no sector posted a positive return.  Exceptions can often be instructive, although I don’t now know what to make of January’s outliers.

Industrials and Consumer Discretionary, although both economically sensitive sectors, outperformed.  They’re also more closely connected than the sector names would suggest, since many US-traded industrials ultimately serve the consumer sector.

Telecom and Utilities, which seemingly operate in an alternate (read:  loser) universe of their own, underperformed–telecom by a very large amount.

Here’s the S&P performance, by sector, for January.  As usual, the overweights of the hypothetical portfolio are marked by + or ++.

Telecom          -9.3%

Materials          -8.7%     +

IT          -8.5%     ++

Utilities          -5.1%

Energy          -4.5%     +

S&P 500          -3.7%

Consumer Disc.          -3.0%

Financials          -1.5%

Consumer Staples          -1.3%

Industrials          -1.2%     +

Healthcare          -.4%

The month was a mixed bag for news.  Most company results have been outstanding, showing strong operating earnings and (for the first time) rising revenues.

On the other hand, the € has plunged after the new government in Greece revealed that the prior administration had falsified the national accounts, so that the debt-laden nation actually has a budget deficit of 12.7% of GDP, or about twice what had been previously reported.

The failure of Congress to embrace any freeze on spending increases for even the tiniest portion of the Federal budget has underlined how difficult it will be for the US to get its fiscal house in order.  Democrats lost the Massachusetts senate seat held by the Kennedy family for many decades in this most Democratic of Democratic states to an unknown Republican.  This has sent shock waves through Washington, frozen legislative action on health care and called the entire Democratic national agenda into question.  (Given that most investors believe gridlock in Washington is the best one can hope for, it’s not clear whether this is good or bad.)

To the hypothetical portfolio:  It lost about 35 basis points to the market during the month.  Results would have been worse, were it not for the outperformance of the overweighted Industrial sector (all other overweights underperformed).

Changes?  I’m making none.  I gave a fleeting thought to putting the + I took from Energy last month back to work.  But I’m content to let the current selling run its course.  I’d also want to add the + to IT, which I think would violate the spirit of this very conservative portfolio.

January 11, 2009

Results from April 1 to yearend

Here are the sectoral results for the S&P 500 for the time the hypothetical portfolio was in operation during 2009:

Financials       +90.6%

IT        +58.2%          ++

Consumer Disc.        +56.6%          ++ until end-September, then equal

Materials        +54.7%          +

Industrials        +51.2%          +

S&P 500        +43.3%

Staples        +27.2%

Energy        +26.4%          equal until end September, then + or ++

Utilities        +23.0%

Healthcare        +18.5%

Telecom        +13.9%

I’ve done a more careful calculation of the portfolio performance, which came in at just over 110 bp ahead of the index.  Why the difference from my earlier estimate?  During the year I had been only doing month by month numbers.  I finally entered the December 31st index and sector data into my spreadsheet, which allowed me to see the added positive effect of the outperformance achieved from April-July in a market that continued to rise.  I knew the “extra” outperformance was there.  I just didn’t know how much.

The best thing the portfolio did was to heavily overweight TI.  The worst mistake was not to overweight financials.  I also should have let well enough alone in September.  Instead, I made two errors, one by removing the overweight in Consumer Discretionary and one by creating an overweight in Energy.

January 5, 2009    HAPPY NEW YEAR!!!

Wall Street marked time for most of December, before rising into new recovery high territory around 1230 on the S&P 500 late in the month, and then dropping sharply in the last few hours of trading on December 31st.

The overall result for the month?–the S&P gained 1.8%.

December and January are both influenced by the actions of taxable investors.  In December, they typically sell losers, or match gains and losses by selling a few winners as well.  In January, taxable investors usually sell winners they have nursed into the new tax year.  And investors of all stripes tend to buy the shares of companies beaten down in the prior month’s tax-loss selling (a phenomenon that has become known as the “January effect”.)

What struck me about December was not so much tax-selling as the pattern of sector performance during the month.  Unlike the relentless buying of economically-sensitive sectors that has marked the market almost every day since March, during last month two defensive sectors, Telecom and Utilities, had their day in the limelight, along with two cyclical counterparts, IT and Consumer Discretionary.

Here is the index performance by sector for the month (as usual, overweight sectors in the hypothetical portfolio are marked with + and ++).

IT          5.6%     ++

Utilities        5.2%

Telecom        4.6%

Consumer Disc.        4.3%

Healthcare        1.9%

S&P 500        1.8%

Materials        1.4%     +

Industrials        1.1%     +

Staples        -.7%

Energy        -1.0%     ++

Finance        -1.6%

Thoughts about the month:

Economic news, both in the US and in the rest of the world, has been a bit better on balance than expected.  Prospects for the technology industry appear to be particularly good.  Treasury yields have been rising along with the dollar, as investors appear to be beginning to anticipate (very far in advance, I think) a move to by the Fed normalize (i.e., raise) short-term interest rates from the present intensive care state.  So far, this has had little negative effect on stocks.

I’m in the process of writing a series of posts on shaping an equity portfolio for 2010.  See them for more details.

The hypothetical portfolio?  It outperformed the S&P 500 by about 4 basis points in December.  The IT overweight produced 19 basis points of outperformance, more than enough to offset the drag on performance from the other three overweight sectors, al of which lagged the benchmark for the month.

I’ve just made a rough calculation of the hypothetical portfolio’s performance from April through December.  It looks to be slightly under 100 basis points, or 1%.  That would be $1,000 for every $100,000 invested.  It’s not enough to retire to Florida on, but it’s not nothing.  And, after all, what can you expect from working for half an hour or so a month?

Once I’m finished with my 2010 review, I’ll do a more careful analysis.

Changes for the month–I’m tempted to do nothing–again.  But I’ve decided instead to remove one of the +s from Energy.  Two reasons:  the sector isn’t performing in the way I’d expected, and we’re entering the weakest season of the year for oil prices (the heating season in the northern hemisphere is almost over, as far as oil refiners are concerned anyway, and the driving season doesn’t get under way until April, so prices end to sag from January-March).

December 2, 2009

November is typically a good month for the market as it enjoys a bounce back from mutual fund yearend selling.  The “good month” proved true again in 2009, although it’s not clear to me that mutual funds were heavy sellers in October.

What was really notable for November, though, was that the winners and losers for the time period didn’t adhere to the straightforward aggressive-stocks-outperform/defensive-stocks-lag pattern that we’ve seen since the S&P bottomed in March.  healthcare and telecom were among the winning sectors; IT and energy fell behind.  The utilities sector seems to be the only one continually denied a place in the sun, as was the case again in November.

The results for the month, by sector, are as follows (as usual, the overweights in the hypothetical portfolio are marked with + and ++):

Materials     11.3%    +

Healthcare     9.1%

Industrials     8.7%    +

Consumer disc.     6.7%

Telecom     6.4%

S&P 500     5.7%

IT     5.0%    ++

Financials     4.2%

Utilities  4.2%

Staples     3.8%

Energy 2.9%     ++

The hypothetical portfolio underperformed the S&P by about 7 basis points.  My decision to add to the Energy overweight is the main culprit, and offset gains from being mildly overweight Materials and Industrials.

Thoughts about the month:

The Reserve Bank of Australia just raised short-term interest rates there for the third time this year.  This is yet another sign that economies in the Pacific are rapidly returning to normal.

The dollar continues to decline, falling by 4.2% against the yen and by 2.0% against the euro during November.  I think further dollar weakness is in prospect, at least until the US economy is strong enough that the Fed can begin to talk about raising short-term interest rates from their present crisis-low levels.   This implies that companies with foreign businesses or an export orientation will likely continue to have superior earnings growth.

The returns from Black Friday and Cyber Monday are in.  At $42 billion+, Black Friday was about flat with last year’s spending.  Cyber Monday was up better than 10% year on year, at close to $1 billion (although personally, I’ve probably gotten 10x more Cyber Monday email coupons than I got last year.  How about you?).

Frugality is this year’s watchword so far.  Electronics are in, clothing is out.  Department stores, which I think offered the largest bargains, appear to have been the biggest winners.   I continue to think that companies that sell primarily to younger consumers will do the best, although there isn’t much evidence so far to prove or disprove my thesis–other than sales of the iPhone and Call of Duty:  Modern Warfare 2 .

As you can read in my posts on Dubai World, the mini-emerging markets scare just before Thanksgiving is proving to have little effect on the rest of the world.  I suspect, though, that we’ll be hearing about political and financial developments within the UAE for a long time to come.

As for December, I see no need to make any changes in the hypothetical portfolio, so I’ll just stand pat.  If this year follows past form, investors will work for the first two weeks or so and then begin to close up shop to celebrate the holidays and recharge their batteries in anticipation of the new year.  In the beginning of the month, the market may go up, but will typically drift thereafter as fewer and fewer market participants remain at their desks.

November 2, 2009

This October was a strange month.

Because virtually all mutual funds end their fiscal years on Halloween, and since funds are required to distribute their income and realized capital gains to shareholders, fund companies typically use October to adjust the size of the distributions they will make.  Either they sell winners to adjust upward, or they sell losers to adjust downward.  But whatever the situation, they usually sell.

Although the timing of the sales varies from year to year, it’s almost always completed before the last week of the month begins–assuming no emergency arises.  That’s to try to make sure no trading problems spill over from one fiscal year to the next.

This year, though, the first half of October was very strong.  After that, stocks drifted down under what I’d regard as light pressure until the last few days of the month, when selling accelerated.  Maybe that just shows that the sellers weren’t mutual funds.

In analyzing the month’s price action, one would expect that economically sensitive stocks would outperform while the market was going up, and underperform as investors started to take profits.

But that expectation of mine didn’t quite hold true, either:

financials, industrials and utilities were all very weak throughout the month;

on the other hand, consumer staples, one of the worst areas to be in through most of this year, was strong during both halves.

Here are the numbers for the S&P by industry (as usual with overweights marked by + and++):

———–thru 10/19———-10/20 on———-total

S%P 500             3.9…………(5.6)…………(1.9)

staples                4.1………… (2.9)………… 1.0

energy                10.5 ………..(6.5) ………….. 3.2         +

IT                         3.2 …………(3.4) ………..(.4)            ++

healthcare           2.7………… (4.9)…………(2.3)

consumer disc.         4.3 ……….(6.4)…………(2.5)

telecom               (3.5)…………(1.5) ………..(4.8)

materials              5.1 ……….(9.5)…………(5.3)              +

industrials             3.2……….(7.6) ……….(4.7)               +

utilities              2.8………..(5.9)……….(3.2)

financials             2.2 ……….(8.0) ……….(6.0)

The hypothetical portfolio outperformed by about 10 basis points.  The positive effects of the overweights in energy and IT more than offset the negative contribution from the overweights in materials and industrials.

Thoughts about the month:

General economic indicators, as well as listed company comments, both continue to confirm that the worst is past for the world economy and a recovery has begun.  Australia and India have already begun to raise interest rates, with other countries doubtless soon to follow.  Rumors have begun to circulate that even the Fed has become comfortable enough to begin considering how to alter the wording of its post-meeting statement to signal that ultra-low interest rates won’t last forever.

At the same time, it’s clear that the US, as ground zero for mortgage abuses, and the UK, where most of the related securitization abuses occurred (to immense profit through employment and taxation), will lag in the upturn.  This is what recent falls in consumer confidence may be signaling–people may be working out that a high school diploma and a friend at a construction site or in a local plant aren’t going to be the job guarantees they have been.

From a stock market point of view, the final quarter of the year is usually a strong one.  With the S&P up 26%, year to date, that may not be true this time around, although I still don’t see any need to adopt a defensive posture.

If I had to make a guess about 2010, I’d expect that we’ll be at 1300 on the S&P 500 by December next year.  That would be about a 15% gain, which I think would be reasonable.  We should certainly be seeing a more vibrant consumer by that time.

I think the really uncharacteristic performer during the month was the industrial sector.  I’m not quite sure why, other than if you take what we call “industrials” in the US and examine what they make, a lot of it is oriented toward the consumer.  But that’s not new news.

Changes to the portfolio:  I’m going to reduce industrials to market weight and put the + that results into energy.  I’m tempted to take the + I removed from consumer discretionary and notionally buy the Vanguard emerging markets index fund with it, but for now, I won’t.

My wife told me I shouldn’t say that investing is boring, as I mentioned last month, pointing out that I have spent the better part of her and my lives doing this.  Maybe I should say instead that investing is a zen-like activity, at least in the sense that you have to remain calm and unemotional to be successful.  You can’t get too high or too low, in reaction to the random ups and downs of the market.  And you also have to remember that it’s a mistake to become too emotionally attached to a given stock or a given point of view.  The object of investing is to make money, not to be right all the time–or to get the emotional enjoyment that other parts of life should bring you.

October 2, 2009

September was a strong month for the stock market, again.  The shape of performance by sector was a carbon copy (talk about an old phrase–maybe “clone” would be better) of the results the market has shown since the lows in March–economically-sensitive stocks were relative winners and defensive, i.e., not so cyclical, were relative losers.

In my experience, the relentless nature of the cyclical outperformance is unusual.  Normally, the stock market is a two-steps-forward, one-step-backward affair, where the groups that will dominate during a market cycle alternate with their weaker brethren in achieving short-term outperformance.  But the defensive groups have scarcely had a turn at bat over the past six months.

September and third quarter industry group performance (overweights in the hypothetical portfolio markets marked with + and ++):

………………………………September             3rd qtr

industrials                    +6.6%        +21.2%        +

consumer discretionary   +5.2%     +18.9%

materials                     +4.7%        +21.0%            +

energy                           +4.6%       +9.5%           +

technology                       +4.5%     +16.7%        ++

S&P 500                         +3.7%     +15.6%

consumer staples           +3.3%      +10.5%

telecom                             +2.8%    +3.9%

financials                       +1.9%      +25.1%

utilities                            +1.1%       +5.0%

healthcare                          +.9%     +8.9%

The hypothetical portfolio gained about 15 basis points vs. the index during September, as the four overweight sectors all outperformed the market.

On a one-month basis, it has been a mistake to remove the overweight in the consumer discretionary sector, which was second only to industrials in performance last month.  A portfolio with weightings untouched from the end of August would have outperformed by another 7 basis points.

Thoughts about the month:

Financials had a sub-par month for the first time in a while.  At the end of August, I said I thought the market had been working its way through the financial sector, starting with the best and rotating into progressively weaker ones as the higher-quality names appeared a bit too pricy.  By August, I  thought the market had reached the bottom of the barrel.  At that point, typically either the market starts the process all over again, starting with the strongest names, or investors lose interest in the sector for a while.  The latter appears to have happened in September.

The dollar weakened by about 3% against the yen and the euro during September.  The new Japanese government said it won’t intervene in the currency markets to stop the yen from rising against the dollar.  China continued to announce potential deals to turn part of its huge dollar pile into physical assets–the latest being a $50 billion arrangement to purchase Nigerian oil.

I think gradual dollar weakness will continue to be a feature of the economic environment for a long time to come.  It’s notable that, the consumer sectors aside, all the outperforming areas of the market have been–and I think will continue to be–beneficiaries of dollar weakness.

Signs that the US economy is stabilizing, and that in much of the rest of the world growth is starting to pick up, continue to emerge.  Most important, after a years-long slide, housing prices in most markets around the country seem to be ticking up.  Economists appear to be in as close to total agreement as they get that the US recession has ended.  Oddly enough, despite this, and despite the fact that investment grade bonds appear to me to be very expensive, investment industry statistics seem to show that individual investors continue to shun stocks and embrace bonds.  Go figure.

The mutual fund tax selling that typically marks September-October may be beginning now.  The decline that marked the opening day of the month is particularly eye-catching.  If so, we could have a couple of weeks of decline, followed by a lull toward the end of the month as funds close their books (remember, the accounting year for most mutual funds ends in October).  Typically, the market regains lost ground in the December quarter.

Although the financial turmoil of 2008 seems like a distant memory, it only reached a boiling point twelve months ago.  The associated economic weakness was only starting this time last year.  Therefore, earnings comparisons are likely to become steadily more favorable over the next six months, as the stability of 2009 results is contrasted with the chaos of 2008.  So, the potential for positive earnings surprises is high.

Changes to the portfolio:  None.  Yes, this is boring.  But if it’s not boring, it’s not investing.

September 4, 2009

August was another interesting (read: peculiar) month.  virtually the entire performance story was financials.  The S&P 500 rose by 3.7% during the month.  Sector returns (the hypothetical portfolio overweights marked with +s), in order, were:

financials     + 15.05

industrials    +4.0%                                     +

materials      +3.7%                                     +

consumer discretionary    +3.3%                ++

technology  +2.4%                                     ++

healthcare    +2.1%

consumer staples     +.8%

energy   +.4%

utilities   +.2%

telecom  -2.4%

Of the ten sectors, only two did better than the market, one tied and the rest did worse.  Note, also, that the defensive sectors were at the bottom of the pile again.  The market “vote” in favor of cyclical recovery continues relentlessly.

Our hypothetical portfolio?  It underperformed the S&P by about 10 basis points.  Our two mildly overweight sectors did fine, but they were more than offset by our heavily overweight sectors, technology and consumer discretionary, which underperformed the index.

Thoughts on the month:

The world, ex the US and UK, is signaling it is getting ready to emerge from recession.  China was the first, months ago.  The two big resource economies, Australia and Canada, as well as France and Germany are all now beginning to discuss in public how to raise short-term interest rates back to normal.  Not the US, though, which makes sense, since we’re the epicenter of the economic problems.  My guess is that the budding economic differences causing differing interest rate policies will manifest themselves on Wall Street and in the City in currency weakness in sterling and the dollar, rather than decline in the local stock market averages.

Retail in the US has been spotty.  Yes, it has been better than analysts have expected, but the improvement–if that’s the right word–comes from cost-cutting.  Normally, Wall Street dislikes this sort of earnings performance, since the gains are non-recurring–you can’t cost-cut your way to profits forever.  Nevertheless, the sector has done very well.  This makes me nervous about our portfolio’s heavy overweight.

Financials are another matter.  Here, I’ve made a major error by thinking they would be poor performers.  What to do?  My own experience with this sort of situation is that the group will continue to do well until I add to my financial exposure (the last bear capitulating), at which point the group will immediately begin to underperform.  So I’m in a no-win situation.

On a more positive note as far as the portfolio is concerned, I think Wall Street was scraping the bottom of the barrel last month–Citigroup, AIG, Fannie Mae, Freddie Mac–to find financials to buy.  (Many times in a sector move, the stocks “ripple” upward–the best stocks go first, the mediocre ones second, and the worst ones last.  Then, either the upward movement starts all over again with the best stocks, or the move runs out of steam.)  This could mean the move in the financials is coming to an end.  Or it could just be another aspect of the infinite ability of the human mind to delude itself.

Experience has taught me that the solution to a dilemma like this is to not accept the problem set up this way.  I should probably retain my weighting but replace a portion of my index position with an individual stock, either STD or BBV (I own the latter).  If the market shows its typical seasonal weakness this month an next, I may be able to do this at more favorable prices.  Bottom line: for now, I should just watch.

The Shanghai stock market?  As I’ve written elsewhere, its decline is not a harbinger of economic weakness in China.  It’s a (temporary) reaction to tightening money policy.

The Japanese election?  Japan will continue to stagnate, unless the Democratic Party of Japan finds a way to increase the workforce, like allowing immigration (fat chance!–they’re paying foreigners now to leave) or giving women equal opportunity, or it makes workers more productive–meaning allowing the market to reorganize inefficient companies.  My guess–same-old, same-old.

Changes to the portfolio:  I’m removing the overweight from consumer discretionary and reinvesting the money in the index.  The heavy overweight in technology, and the overweights in materials and industrials remain unchanged.

August 1, 2009

In the course of writing my Shaping a Portfolio for 2010 series of posts in the beginning of April, I outlined what I thought would be an appropriate equity strategy for the following months.  I suggested keeping 85% of the money you would allocate to equities in an S&P 500 index fund; putting 2.5% each in sector funds for technology, consumer discretionary, industrials and materials; and placing the final 5% into two individual stocks, one in technology and one in consumer discretionary.

It’s now four months later.  How is that strategy panning out?

The return of the S&P 500 from April through July has been 25.0%.  In a world where I think the average annual equity return will be below 10%, this is a huge amount.  This is partly a reflection of how horrible the preceding, panic-filled months had been.  But we can see now that the upturn was fueled not only by a gradual calming down of investor angst (no thanks to television investing commentators, who fan the flames of the emotion de jour) but also by the first signs that the economy might no longer be in free fall.

Sector returns, in order, have been:

financials                               +60.2%

technology                             +30.1%

consumer discretionary          +30.0%

industrials                              +28.5%

materials                                +27.5%

energy                                    +15.7%

consumer staples                   +15.3%

utilities                                   +14.1%

healthcare                              +12.3%

telecom                                  + 7.0%.

To me, two things jump off the page:

–how good financials have been (which I didn’t expect), and

–the sharp dropoff in performance once the list reaches the energy entry.

An aggressive professional investor (not us, but someone who has craft skills and is willing to put in 50 hard hours of work on this week after week), given my starting point, might well have increased the emphasis on the sectors that were doing well and made financials into an overweight.  But, if so, he would probably be paring these back tactical overweights now.  In any event, though, this is not a thought for anyone, like ourselves, who has a life apart from the stock market.

Our performance?  I’ve realized I have to set up a section about Portfolio Management, in which I’ll talk about how to measure performance.  But for now, trust me when I say that, assuming no sector outperformance or underperformance from individual stock selection, the equity structure I suggested would have about returned 25.7%.  (A really precise calculation would include, among other things, the timing of dividend payments in what are called “daily linked returns.”  These are a pain in the neck to do and, I think, aren’t really necessary.)

Is this good?  I’d say yes…maybe yes! The way I look at this is that the deviations from the index have been relatively small, so the risk of the portfolio hasn’t gone up by much.  The amount of time invested, maybe measured by Current Market Tactics posts, in monitoring the portfolio hasn’t been too onerous.  And 70 basis points (each basis point is 1/100th of a percent) of outperformance is more than the average professional achieves in a typical year.  Put another way, for a few hours of time I have $700 that I wouldn’t otherwise have for every $100,000 invested.

Given my very strong belief that successful investing is mostly boring, this is nothing we should get super-excited about.  But it’s not bad.  Let’s see if we can repeat this success.

Where to from here?  For now, I don’t see any reason to change the portfolio structure at all.  I expect the next major market-moving event will be the reemergence of sales growth, with the leveraged positive effect that will bring for the profits of business cycle-sensitive sectors.  The very wide spread between outperforming an underperforming sectors since April may tempt some to rotate the portfolio in anticipation of some catch-up from the laggards.  But that may not happen.  And I think, for anyone but the most nimble (read: lucky), the risk of being in bad position as and when the market makes another upward move is too great.

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