Briefing/Stock Brief: Sector Performance: Encouraging Signs
10-Dec-01 10:47 ET
[BRIEFING.COM - Robert V. Green] Exactly thirteen weeks ago, it was Monday, September 10. No one knew how the world would change on the next day. Since then, the market has struggled to find the proper place as an outlook for the future. Now, however, it seems clear: the market has bottomed. The Nasdaq, the S&P500, and the Dow have tested lows, and rebounded. This is encouraging, but an analysis of recent sector performance is even more encouraging.
The Overall Market Performance
Every major market index was headed down during the summer of 2001. It is somewhat remarkable that the bottom of the market was reached only 10 days after the Attack on America, and only about 11% lower than the overall market on September 10. In hindsight, it is fair to say that the Attack on America did not have a major impact on the markets. Some of the 11% decline post-Attack would likely have happened anyway. It may be reasonable to say that the Attack on America only affected the markets by about a 5% decline, which was quickly recouped.
Measuring the performance of the market from just before the Attack the America allows us to view how the market has processed all of the information since September 11: the terrorist threat, the declaration of recession, the elimination of 30 year bonds, and every economic indicator over the last three months.
The table below measures the market performance from the close on September 7 and November 9 to the close on December 7.
Index 4 week percentage change 13 week percentage change
Dow 4.6% 4.6%
S&P 500 3.4% 6.7%
Nasdaq 10.5% 19.8%
The Dow had regained, almost exactly, its September 7 position on November 7. The other indexes have made half of the gains since September 7 in the last four weeks.
What these returns indicate is fairly clear: the market does not feel that the outlook view today is that much worse than the outlook on September 10, the day before the Attack on America.
Sector Performance
The recent performance of various sectors also tells an interesting story. The table below shows the performance of major sectors of the market.
Sector 4 week returns 13 week returns
Technology 12.9 30.5
Transportation 10.1 3.6
Consumer Cyclical 9.8 2.7
Basic Material 7.7 5.5
Service 7.1 13.7
Capital Goods 6.2 2.9
Financials 3.4 6.0
Healthcare 2.7 5.6
Consumer Non-Cyclical -0.2 -0.6
Utilities -2.4 -6.1
Energy -4.2 -5.9
The technology sector receives a lot of media attention, because it has been the leader of the market for much of the past decade. Clearly, optimism about rebounds in the technology sector is strong.
However, the interesting story of these returns are in the other sectors.
Reading The Tea Leaves
When the four week return is higher than a 13 week return it means that investor faith has recently strengthened in that sector. There are four sectors in that category.
Consumer cyclicals, basic materials, and capital goods are all sectors that are hit hard in recessions. With strong returns over the past 4 weeks, there is only one conclusion: the market believes that the risk to these stocks has lessened. The only plausible explanation is that the market feels the recession is already over.
The transportation sector is also a recession impacted industry, however, this sector may also be driven by events in Afghanistan. If it terrorist strength is weakening, the threat to airlines may be lessened. (Dow theory has always pointed to the transportation sector as a leading indicator of the economy, on the idea that transportation of basic materials to factories is a sign of increasing demand. Dow theory may be less applicable in today's economy, however, than it used to be.)
The poor returns of consumer non-cyclicals, utilities, and energy point to another core belief: low to little inflation. The returns in each of these sectors are strongly affected by pricing pressures and inflation. All three of these sectors are things that everyone must buy, even in recessions. In periods of inflation, the stocks have some degree of pricing protection, which allows them to protect their revenue and margins. As such, they perform more strongly in inflationary periods. The weakness in these stocks indicates the market believes economic growth will not be overshadowed by inflationary pressures.
When you put all of these interpretations together, you get a picture with three combined themes:
* The end of the recession, meaning a return to strong economic growth
* Continued low inflation, or even lower inflation, will persist
* Lower risk of terrorist activities
* Stronger faith in technological advances
This is an extremely positive combination of themes.
Clearly, in recent weeks, the movement of the major market indexes has been encouraging. But it is also encouraging to see that the picture painted by sector returns is one of a growth economy, with low inflation, and technological innovation. Those factors have been the driver of the economy, and the market for the last 15 years.
Reading the sectors movements provide a view of what the "market" is anticipating for the future. Whether the market is anticipating correctly, or is simply longing hopefully for the great market drivers of the past, remains to be seen, of course.
Nevertheless, with all caveats in mind, the recent market and sector performance can only be interpreted as an encouraging indicator for the future.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com
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