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.
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. I have switched my position from earlier in the year in regards to housing improving in the second half of 2008 to the second half of 2009 or possibly early 2010 as lending standards are far too tight for a rebound to occur in the short term. My opinion on energy is that we are much more likely to see oil fall below $100 then to rise back to its old highs in the second half of the year as demand continues to slowly decline and output is slowly climbing but any geopolitical surprises could of course change this equation. With lower energy prices and the election season upon us, the Fed is likely to remain with neutral policy through the end of the year. As I mentioned in a prior posting, unemployment rate climbs of 0.5% or more have on all 18 past occasions led to a very significant rally (15%+) in financial markets over the next year.
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.
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. I have switched my position from earlier in the year in regards to housing improving in the second half of 2008 to the second half of 2009 or possibly early 2010 as lending standards are far too tight for a rebound to occur in the short term. My opinion on energy is that we are much more likely to see oil fall below $100 then to rise back to its old highs in the second half of the year as demand continues to slowly decline and output is slowly climbing but any geopolitical surprises could of course change this equation. With lower energy prices and the election season upon us, the Fed is likely to remain with neutral policy through the end of the year. As I mentioned in a prior posting, unemployment rate climbs of 0.5% or more have on all 18 past occasions led to a very significant rally (15%+) in financial markets over the next year.
