Sector Rotation from Ed Yardeni

by Laura Ehrenberg-Chesler on September 15, 2016

in equity market,interest rates,Investment Strategies

Ed Yarden’s research piece this morning highlighted the major sector rotation that has been underway the past few weeks. I thought it was worth posting to our blog today. It is very revealing, and helpful, for analyzing performance this year.

Conversely, the sectors to which investors flocked for income earlier this year–Utilities, Consumer Staples, and Telecom–all lagged behind the S&P 500 in the last month. Here’s how the S&P 500 sectors performed since the market’s selloff began on August 16 through Tuesday’s close: Financials (-0.7%), Tech (-1.1), Energy (-1.9), S&P 500 (-2.9), Utilities (-3.3), Industrials (-3.5), Consumer Staples (-3.8), Materials (-3.9), Health Care (-4.6), Consumer Discretionary (-4.8), and Telecom (-5.7) (Table 1).

The change among the leaders and laggards is stark, as Telecom has moved from first place to last and Financials has done just the opposite. Here’s how the S&P 500 sectors performed from the start of the year through the August 15 peak: Telecom (19.5%), Utilities (15.2), Energy (14.0), Materials (11.8) Industrials (10.0), Tech (8.9), Consumer Staples (8.5), S&P 500 (7.2), Consumer Discretionary (4.9), Health Care (3.8), and Financials (0.5) (Table 2). Let’s take a look at how some of the S&P 500 industries have fared during this major sector rotation in the market:
(1) Climbing to the top. Many of the industries that led the pack going into the market’s August peak now are among the worst performers. The reverse holds true as well, i.e., the worst are best since the peak. As you’d expect given the strong performance of Financials, many industries in the sector were among the top 25 performing industries over the last month. The outperformers included Life & Health Insurance (4.0%), Regional Banks (2.7), Investment Banking & Brokerage (2.6), and Diversified Banks (0.7). Each was among the 25 worst-performing industries from January 1 through the market’s August peak.

(2) Remaining in the lead. Some of the industries that were among the top 25 performers from January 1 through August 15 were also at the top of the list during the recent selloff. The stalwarts include Oil & Gas Storage & Transportation, up 38.3% going into August 15 and up an additional 7.6% since then, Semiconductor Equipment (26.3%, 3.9%), and Casinos & Gaming (49.9, 0.0).

(3) Still in the doghouse. Conversely, some of the dogs continue to be among the worst-performing industries. For example, Specialized Consumer Services lost 27.0% from January 1 through August 15 and lost 9.0% from the S&P 500 peak through Tuesday’s close. Other chronic underachievers include Oil & Gas Drilling (-4.7%, -11.3%), Health Care Distributors (-4.1, -7.0), Health Care Services (-3.7, -6.7), and Home Furnishing Retail (-3.6, -6.9).

(4) Falling from grace. And lastly, some of the industries that were among the top 25 performing industries going into August 15 were among the worst-performing industries over the past month. Many of the industries in this last category are related to the housing industry, which may get dented if interest rates rise too far too fast. However, profit-taking also may have played a role in the weakness of some of the stocks that had the best performance going into the market reversal. Among the housing-related industries, Building Products was up 21.3% from January 1 through August 15 only to fall 8.7% since then. Similar action occurred in Construction Materials (34.3%, -9.2%), Household Appliances (25.9, -9.8), and Housewares & Specialties (24.5, -9.5).

After a strong run in the first part of the year, commodities also have fallen sharply in the past month. Diversified Metals & Mining, which rallied 79.8% through August 15, is down 16.6% since then. Steel was in the same sinking boat (28.0%, -10.8%). Gold, which is both a commodity, and is also interest-rate-sensitive, fell from its spot as the top-performing industry since the start of the year through mid-August, with a 149.7% return, to become the third-worst-performing industry, losing 13.1% since August 15. Kiss the summer doldrums goodbye.”

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