The S&P 500's Hottest Sector: Materials
By Paul Vigna
Shares of the companies that mine or make raw materials are
lately trading like once-hot technology stocks.
The S&P 500's materials sector, which includes companies
such as Linde PLC, Air Products & Chemicals Inc. and
Sherwin-Williams Co., is up around 5.4% this month, even as the
broader index has fallen more than 4%. The group has climbed 16%
this quarter, the best performance among the S&P 500's 11
Some individual companies have posted even bigger gains.
Crop-nutrient producer Mosaic Co. has risen 54% this quarter, while
miner Freeport McMoRan Inc. has added 47%.
That's a reversal from earlier in the year, when tech stocks
including Apple Inc. and Google-parent Alphabet Inc. powered major
indexes to new highs and the materials sector largely traded in
line with the S&P 500. The tech sector Friday notched a third
consecutive weekly decline, its longest string of weekly losses
Fueling gains in materials shares: bets on an economic recovery,
which have powered a rebound in prices for commodities like oil and
industrial metals. Materials stocks began outpacing the broader
index after the Federal Reserve in March announced it would do
whatever it takes to support markets and the economy. By June, the
Bloomberg Commodity Index -- which in March hit its lowest point in
at least 20 years -- was rebounding.
The recent climb in commodity prices suggests materials shares
could go even higher, some investors said.
"Commodity longs are about to be on the right side of a major
asset-class move," said Michael Oliver of Momentum Structural
Analysis, "that likely won't stop until it reaches extreme excesses
of its own."
Companies are starting to rebuild after the economic collapse
this spring and putting in orders for things like lumber, copper
and zinc, said Tom Stringfellow, president of Frost Investment
Advisors in San Antonio, Tex.
Business surveys also reflect that effort. New orders from
manufacturers have been up for three months, according to the
Institute for Supply Management. Meanwhile, inventories have been
That dynamic should lead to growth in new deliveries, Mr.
Stringfellow said. Tech's gains have been predicated on the idea
that more of daily life is moving online. Materials mark a bet that
the real economy will recover, and grow, he said.
"It's like the canary in the coal mine," Mr. Stringfellow
Companies in the sector often operate in consolidated industries
with earnings protected by contracts and rental income, said Peter
Clark, an analyst at Société Générale.
Specialty-gases provider Linde PLC, the materials sector's
largest company by market capitalization, is itself part of that
consolidation, a result of a merger between Linde AG and Praxair.
The company has beaten earnings expectations for the past six
quarters. Shares are up more than 17% this quarter.
The rebound in materials shares could be a sign that the economy
is recovering enough to lift other beaten-down sectors, such as
industrials and financials, Mr. Stringfellow said.
Gains in the materials sector offer a better reading on the
broader economy than the climb in tech, he said. Rising prices for
materials like lumber and steel reflect rising orders in industries
like housing and autos. That will eventually drive more activity
and bring in even more sectors, like energy and banks shares.
"Some of the sectors that haven't participated yet, I think they
do" in the coming months, he said. "I would say overall economic
growth is building, despite not being out of Covid territory."
Write to Paul Vigna at firstname.lastname@example.org
(END) Dow Jones Newswires
September 20, 2020 10:14 ET (14:14 GMT)
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