S&P Sectors Impact: A Look at 9 ETFs

The financials lead the market market down as the primary bad guys. Consumer staples, utilities and to some degree healthcare provided support that prevented greater declines. Energy and basic materials collapsed into the market trend, and have recently been providing some lift effect. Industrials and technology essentially hugged the overall index path.

Given the very strong negative contribution by the financials to the index performance, and their central role to all other industries, it seems difficult to see how the S&P 500 can recover too much more of its recent losses unless the financials recover too. Are they done declaring losses, or are they not? That is a key question. We see greater likelihood of more asset problems before we’re done. When that will be and how far in advance the market will discount that is anybody’s guess.

Government Policy Dependent Economy

We are still in a government policy dependent economy. Traditional analytic tools amount to nothing if executive or legislative action can change the rules or the supply/demand forces virtually on a day-to-day basis.

The various programs announced and implemented by governments are certainly meant to help. Eventually they will restore the health of financials, although perhaps at great cost to taxpayers, which could have countervailing economic impact.

According to Bloomberg, the total of US bailout commitments is about $12.8 Trillion, which compares to an approximate $14 Trillion US GDP. They said that translates to $42,000 per man, woman and child in the US. That means a family of four now owes $168,000 for the bailout. We can only imagine how much differently the economy would have responded had the government given a $42,000 check for each citizen, instead of $500 tax rebates and billions to the institutions and management teams that engineered the financial crisis in the first place.

Auto Industry

People once said, what’s good for GM is good for America. The corollary is that what’s bad for GM is bad for America. Let’s keep our fingers crossed that the evolving situation at GM is good for GM.

Once the auto industry and the banking industry are “fixed”, we should return to a more normal world, although at a lower level of leverage, higher level of regulation of financial instruments, and with at least somewhat better credit underwriting. That means lower levels of profit growth and therefore lower earnings multiples and slower market gains.

Nibbling May Make Sense

While we do believe that the current rally is a bear rally, we believe that it is time to begin selectively buying stocks with strong balance sheets, low debt and protected dividends with the reasonable prospects for growth. There are probably opportunities among the wreckage.

Caveat - To the extent that dividends can meet your current cash flow requirements, or if you have no investment income requirements, you can afford to take the long view on price recovery. To the extent that you have cash flow requirements and your stocks do not provide for that through dividends (necessitating periodic asset sales), more caution may be in order.

Relative Performance Charts

Here are nine charts showing the relative performance of the S&P 500 index (proxy SPY) and its nine sector funds: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY.

Comments

[mariocavolo:]

You bet Richard...they're crooks

"We can only imagine how much differently the economy would have responded had the government given a $42,000 check for each citizen, instead of $500 tax rebates and billions to the institutions and management teams that engineered the financial crisis in the first place."

Apr 03 04:07 AM

[omooc:]

Good charts. Is $SPX=SPY? Needs explanation. Needs charts for shorter time period.

Apr 03 09:59 AM

[Richard Shaw:]

$SPX is the S&P 500 index itself. SPY tracks the index, but is not the same thing, and does not track it perfectly in the very short-term.

Apr 03 04:29 PM