Consumer-Driven Stocks Help S&P to New Highs --Streetwise
August 31 2016 - 9:57AM
Dow Jones News
By James Mackintosh
The S&P 500 in August achieved an unusual feat: the index
reached new highs, while only one of its ten sectors hit a record,
as the dynamics behind the rally changed.
With one day's trading left, the sole sector to hit a new top
has been consumer discretionary, made of up companies such as
McDonald's, Amazon and Starbucks that consumers can live
without.
It's extremely rare to have market highs without at least a
couple of sectors hitting new peaks, and investors often worry that
when just a small group of companies is leading the S&P higher,
the market may be frothy.
However, the lack of other sectoral records this August may be
explained by another phenomenon driving the U.S. market: the
rotation back into the out-of-favor stocks that tend to do well
when the economy is stronger. The absence of repercussions from the
Brexit vote in June and two strong jobs reports helped these
cyclical sectors to rebound, after being shunned earlier in the
year in favor of safer bond-like stocks.
The last time free-spending consumers were the only sector
helping the market to a new high was in May 2015; the S&P 500
didn't recover back to that level until two months ago.
The success of consumer stocks fits the broad pattern of the
economic recovery, which has been led by household spending, not
corporate investment. The Conference Board consumer-confidence
survey on Tuesday was ahead of forecasts, and aside from some
strong readings last year is the highest since the credit crunch
hit in the summer of 2007. The consumer staples, companies that
sell stuff people need or are addicted to, have also done well,
hitting a high in July before being dragged down as safer stocks
fell out of fashion.
The best-performing sectors in August were IT, financials and
energy, which have given the market a significant boost since they
started beating the S&P 500 this summer. Yet, they have little
chance of reaching new highs any time soon, as they remain far
below peaks hit respectively in the dotcom bubble of 2000, the
credit bubble of 2007 and the oil boom of 2014.
The stock rotation has hit the so-called "bond proxies" of
utilities and telecommunications, which fell along with Treasurys
in August . These alternatives to expensive bonds were the
worst-performing sectors in the month so far, down more than 5% as
their stable cashflows became less appealing-- although telecoms
are still up 15% this year and utilities up 13%.
Investors who look at the concentration of gainers and losers in
the market usually worry that as bull markets near their end,
investor interest becomes excessively focused on a small number of
fashionable stocks. But even as the number of sectors setting highs
has narrowed, the market has remained broad on other measures. The
most-watched gauges are the "advance-decline" line showing numbers
of gainers minus losers, and the percentage of companies clocking
up new 12-month highs, neither of which is raising a red flag.
"More stocks are participating in this rally," said Todd Sohn, a
technical analyst at Strategas Research Partners in New York.
"That's good news."
Another sign that the market is not as narrowly focused as the
lack of sector highs suggests is the outperformance this year of
both small-capitalization stocks and the equally weighted version
of the S&P 500. Both are up just shy of 10%, against 6.5% for
the S&P 500, as smaller companies beat the mega-caps that
dominate the main market-cap-weighted S&P.
Since 1995, new highs in the S&P have been accompanied by
only one sector setting a record just three times previously--last
May and, before that, two months when the market was led higher by
healthcare amid the biotechnology boom and pharmaceutical mergers.
Even the dotcom bubble's excesses of March 2000 were accompanied by
the industrial sector hitting a high, helped by the internet appeal
of General Electric, the largest industrial stock.
Write to James Mackintosh at James.Mackintosh@wsj.com
(END) Dow Jones Newswires
August 31, 2016 09:42 ET (13:42 GMT)
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