How Government Policies Affect Markets

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 |  Includes: BP, CAT, DE, F, SPY, T, TM, VZ
by: Frank Holmes

One key element of our investment process at U.S. Global Investors is tracking and monitoring government policies. We believe policies are precursors to changes in the marketplace and taking a look at year-to-date performance of the S&P 500 Index is a good way to illustrate how.

This chart shows the year-to-date performance for each sector of the S&P 500 through the end of the quarter. Consumer discretionary (up 12.11 percent) and industrials (up 11.45 percent) have been far and away the top performers, nearly doubling third place telecom, while energy (down 2.34 percent) and healthcare (down 2.48) are the worst performers.

S&P 500 Economic SectorsClick to enlarge

The performance of both the best and worst sectors can be traced back, at least in part, to government policies.

Consumer discretionary has drawn much of its performance from the auto retail sector which is up almost 45 percent. One driver has been better-than-expected auto sales but another was Toyota’s (NYSE:TM) recalls and the resulting Congressional investigation. Toyota’s fall has been Ford’s (NYSE:F) and other domestic manufacturers’ gain as they have wrested back market share from foreign companies.

Rising overseas sales for construction and farming equipment manufacturers such as Caterpillar (NYSE:CAT) and Deere (NYSE:DE) have buoyed industrials. Investors have flocked to telecom, which is represented by AT&T (NYSE:T) and Verizon (NYSE:VZ), as an income play since the current dividends for those companies are yielding 5-6 percent.

Energy and healthcare have felt the sting of government policies. Uncertainty about healthcare reform has kept providers and pharmaceutical companies at depressed levels. For energy, the BP (NYSE:BP) disaster and ensuing drilling moratorium took down the drillers, suppliers and producers. Like the Gulf Coast, the sector has yet to recover and government officials have given no indication as to when the drilling ban will be lifted.

Possible quantitative easing (QE) measures have led to the run-up in materials. The market’s anticipation of these measures has been commodity positive and dollar negative. We think this could be one of the best sectors during the fourth quarter but there is a risk of a pullback if QE measures don’t meet market expectations.

Disclosure: Long positions in Verizon, Caterpillar, AT&T