Stocks: a Bit Less Bad

New leadership, old risks.

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Dan Weiss, who blogs at Vestopedia (here via Seeking Alpha), points to a recent shift in market leadership:

As of June 30, 2008, the year to date performance of sectors in the Russell 3000 Index were as follows (from best to worst):

  • Energy +12.8%
  • Materials +2.3%
  • Utilities -2.9%
  • Consumer Staples -7.9%
  • Industrials -11.9%
  • Health Care -12.3%
  • Technology -12.6%
  • Consumer Discretionary -15.6%
  • Telecom -16.9%
  • Financials -27.1%

From June 30, 2008 to August 8 we have seen a near complete shift as can be evidenced by the following returns in the period (the figures in parentheses are the numbers year to date to 8/8/08):

  • Health Care +10.2% (-3.3%)
  • Financials +9.3% (-20.3%)
  • Consumer Staples +7.5% (-1.0%)
  • Consumer Discretionary +7.2% (-9.6%)
  • Industrials +4.8% (-7.7%)
  • Technology +3.8% (-9.2%)
  • Telecom -3.9% (-20.1%)
  • Utilities -8.3% (-10.9%)
  • Materials -8.5% (-6.4%)
  • Energy -19.0% (-8.6%)

So what has happened? We have seen a complete shift in the currency trade with the dollar up significantly in the third quarter as a result of slowing growth in emerging markets, fears of a economic recession in Europe which has thus far not been sufficiently addressed by the ECB, a thus far fairly resilient U.S. economy and a more balanced economic policy by the Federal Reserve. The climbing dollar has helped to alleviate some of the pressures of rising energy and food prices. We have also seen a significant increase in M&A activity within the health care sector (especially in the biotech and generics market) which is not surprising considering the potential change in political policies next year.

BlackRock's Bob Doll doesn't see the end in sight for market volatility, but says considering the above improvement, there might be some opportunity in equities now as markets muddle through the rest of the year.

We continue to believe that the S&P 500 will remain in a trading range of between 1,250 and 1,450 for some time. We advocated some caution when stocks were at the higher end of that range. Now, with stocks at the lower end of that range, we believe it would make sense for investors to become more constructive and to take on some additional risk.

My take: Stocks do look cheerier after last week's rally. Problem is, the things that have held stocks back like high oil or the weak dollar aren't necessarily easing up permanently. Nor are they the most encouraging of signs that the overall economic situation is improving. A weaker euro, for example, helps the dollar but signals a tougher environment in European export markets. Cheaper energy and food are great, unless lower demand hints at slower global growth. And Doll's case that range-bound stocks are a better bet because they're hovering at the bottom of a range don't exactly spell "easy rally" for your average investor. Still, you don't fight the tape, and as stocks continue to climb today, there is reason to hope that markets could at least be finding a resting spot after this year's sizable drop.

Let's give the last word to Weiss, with a bit of cautious optimism (emphasis mine):

Of course, the big question now is whether this is just a headfake and the old leadership from earlier in the year—i.e. energy and materials—will return to leading the market or whether this is a real shift that will allow for new leadership groups to emerge in the more beaten-down areas of earlier in the year. My opinion remains that we have set ourselves up for a strong second half rally but that certain risks do still exist within the financials sector (especially in the commercial area) and pharmaceuticals.