sábado, 27 de julio de 2013

sábado, julio 27, 2013

Wall Street's Best Minds

FRIDAY, JULY 26, 2013

What the Sector Returns Are Telling Us

By SCOTT WREN

Wells Fargo Advisors' top stock strategist recommends buying cyclical stocks on the dip
 

Earnings season is nothing to write home about. Economic growth in the United States may come in below 1% in the second quarter. The battle over the debt ceiling lies ahead in Washington.

Growth in the emerging world appears to be slowing down. Recent news out of Europe keeps reminding us that their financial problems are far from over. So investors are hiding, right?

Not quite. As the Standard & Poor's 500 has posted a series of record highs, it is the way the market achieved these milestones that is grabbing this strategist's attention. A quick look at sector performance over the last three months tells an interesting story. Financials, Industrials, Consumer Discretionary, Energy, Information Technology and Materials are, in order, the top six performers.

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What do these sectors have in common? Their fortunes, to a large extent, are tied to the ebb and flow of the economy. The better the economy, the better their businesses perform. They are considered "cyclical." Some may have more of a domestic tilt but the majority are also highly dependent on what is happening globally.

What sectors are scraping the bottom of the barrel in terms of performance over the last 90 days? From worst to less bad they are Telecom Services, Utilities, Consumer Staples and Health Care.

What traits do these sectors share? They are far less tied to the growth of the economy because we tend to use their products and services whether the economy is good or bad. They are considered "defensive." This attribute is why investors typically hide in these sectors when they fear the economy is on the verge of slipping into recession or when the Federal Reserve is hiking interest rates with the goal of slowing the pace of growth. And certainly, right now, the last thing the Fed wants to do is cause economic growth to slow further.

During the first three or four months of the year, the defensive sectors were the best performers as the stock market climbed to new highs. We argued at the time that investors were likely to change their tune and rotate into the more cyclical sectors as the economy moved ahead. It is highly unusual for defensive sectors to lead any meaningful rally in stocks for anything other than a brief period of time. Reasonable valuations helped but for the market to move higher those sectors more sensitive to the economy needed to take the lead.

And that is clearly what has happened over the last three months. We believe that this rotation into the more cyclical sectors is worth paying attention to. After all, the stock market is typically a pretty reliable predictor of future economic conditions. While the domestic and global economies have stumbled over the last several quarters, our opinion has been that the next 12 to 18 months would feature modestly better growth with little inflationary pressure.

We expect volatility in coming months to increase and that any market pullbacks might briefly be more defensive. We recommend using any corrections to add to cyclical sector exposure. Sector performance is telling us something. Are you listening?

 


Wren is senior equity strategist with Wells Fargo Advisors, a subsidiary of Wells Fargo & Co.
          

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