Haves versus Have-nots in the Stock Market

As discussed in my September post, “Summer Goes Out with a Bang”, the varying performance of the S&P sectors is preoccupying my interest these days.   While the S&P 500 closed Friday, October 7th, fairly flat year to date at -.54% including dividends (or “total return”), the disparate performance of the S&P sectors continues to confound investors. Look beneath the surface of the overall market and you see a case of the “Haves versus the Have-nots”. For the year, the Haves continue to be Consumer Discretionary stocks. The year’s Have-nots are the Energy and Materials stocks. Year to date performance, including dividends measures a positive 8.96% for Consumer Discretionary stocks including and -11.71% for Energy stocks. This is a gap of over 20%!

12/31/14-10/9/15 Performance vs S&P Price/Earnings Dividend Yield
Consumer Discretionary 8.96% 9.59% 21.73 1.55%
Energy -11.71% -11.17% 17.52 3.30%
Standard & Poors -0.54% N/A 17.84 2.15%

Source: Bloomberg 10/9/15

Why are Consumer Discretionary Stocks so attractive?

Consumer Discretionary stocks are benefiting from a strengthening US economy (gross domestic product was up 3.9% last reading) and reflect a surging consumer confidence that rose to 103 in September; this compares to an average of 92.6 last December, so confidence is up over 10%. Reported unemployment is a low 5.1% and consumers are spending more than 3% compared to last year. Additionally, residential investment, which acts as a positive multiplier to domestic growth and consumption, is up. Another potential positive are seasonality effects with retailers soon entering the holidays.

While the Consumer Discretionary sector tends to be domestically focused, there have been some sour notes from some of the marquee brands with international appeal. The strong US dollar has hurt exports and foreign tourists are buying less Tiffany, Michael Kors, and Fossil.  Nevertheless, the US consumer may offset this weakness but with an almost 22 P/E (price to earnings) ratio, this sector may be at its maximum value unless quarterly earnings are robust.

Energy Stocks are the current Have-nots

The Energy Sector stocks, in contrast to Consumer Discretionary sector, have been the biggest underperformers for the last year, primarily dragged down by global weakness, overproduction and the strong US dollar. Energy investors are being “paid to wait” with an average dividend yield of 3.3%, well above the S&P’s 2.15% yield. The World Bank expects oil prices to marginally improve in 2016 and notes some positive significant implications of low prices. These include a reduction in inflation, external and fiscal pressures for oil-importing countries. Notably, the consumer among others is the winner in developed oil importing economies.

Where to go from here?

While sector analysis is no substitute for individual stock analysis when making investment decisions, it is critical to help understand the prevailing market dynamics. At the time of writing, Energy stocks, while still down for the year, have rallied from their lows. Month to date performance shows Energy leading with a 12.5% gain followed by Materials showing a 10.56% advance. Consumer Discretionary, while still the year to date leader, have advanced far less impressively, at 4.69%.

Rotation in sector and stock leadership can presage a turn in the market. With lower average volatility in the last few weeks, Energy leadership may be indicating improved macroeconomic conditions. Additionally, Energy stocks may have hit bottom so this may be a buying opportunity for the long term investor.  It is too soon to tell where the world economy is in the healing cycle, but be confident that theHuffmanBroadsheet.com will keep you up to date on major investment themes going forward.

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