Energy’s hot and telecom’s not. That’s the unambiguous and consistent message in year-to-date total returns for equity sectors across Standard & Poor’s three main capitalization spectrums.
In the large-, mid- and small-cap stock indices, otherwise known as S&P 500, S&P 400 and S&P 600, energy remains the clear winner this year through November 17.
The soaring price of oil, gasoline and natural gas in 2005 explain the surge in stocks tied to the production and distribution of those fuels. But with crude’s price in decline since late August, there’s reason to wonder if the bull market in energy stocks is due for a lengthy consolidation/correction beyond what’s already unfolded. The
While the market ponders the future of energy stocks, there’s no debate about telecommunications services, which is to say that the latter could hardly look less enticing as an investment. That may attract hard-core contrarians, but most investors will probably stand clear until and if a bottom reveals itself. Although telecom returns are firmly in the red year-to-date across the capitalization field, the losses are especially deep in the small-cap realm of the S&P 600, where the telecom sector’s shed more than 15% this year through November 17. That’s by far the biggest loss for any sector in any S&P capitalization bucket.
Moving from the clarity of the past to the uncertainty of the future, we turn to a report published today from Joseph Abbott and Ed Yardeni, Oak Associates’ chief quantitative strategist and chief investment strategist, respectively. After crunching the historical numbers on the ten S&P 500 sectors, they offer a few tidbits about what may be in store in the future, albeit tidbits that fall short of surprising, as Yardeni writes in an email to clients today. Among the report’s highlights:
* The consumer discretionary sector “usually outperforms significantly near the end of [interest-rate] easing cycles and significantly underperforms when the Fed is tightening.” Since the latter has been the prevailing trend for more than a year, it’s no wonder to learn that Abbott and Yardeni recommend an underweight position (relative to its weight in the S&P 500) for this sector.
* Energy tends to lag during easing cycles and has been a mixed performer when the central bank tightens. Despite recent declines for energy sectors, Abbott and Yardeni recommend an overweight position here.
In addition to energy, Oak Associates advises just two other overweights among the S&P 500 sectors: healthcare and industrials. The underweights, along with consumer discretionary are: financials, materials, and telecom. The remaining sectors–consumer staples, information technology, and utilities–all receive market-weight recommendations from Abbott and Yardeni.
Only time will tell if such recommendations will yield alpha relative to Mr. Market’s weights, which can always be had by purchasing an S&P 500 index fund. On that note, we’ll leave you with the only sure thing when it comes to analyzing the stock market: yesterday’s numbers. As such, here’s how the sectors in the three market-cap groups compare for year-to-date total returns (in descending order by sector) through yesterday:
S&P 500 2.55%
Energy 27.46%
Utilities 11.32%
Financials 2.96%
Health Care 2.83%
Info Tech 2.35%
Cons Staples 1.51%
Industrials -1.23%
Materials -1.88%
Cons Disc -6.74%
Telecom Svcs -7.55%
S&P 400 9.61%
Energy 45.00%
Health Care 15.71%
Cons Staples 12.14%
Industrials 9.47%
Financials 7.03%
Info Tech 6.62%
Utilities 6.30%
Cons Disc 1.10%
Materials -2.01%
Telecom Svcs -6.27%
S&P 600 6.26%
Energy 46.65%
Health Care 14.15%
Industrials 12.04%
Utilities 4.69%
Materials 2.84%
Financials -0.42%
Cons Disc -1.43%
Info Tech -1.52%
Cons Staples -4.18%
Telecom Svcs -15.10%
Source: Standard & Poor’s