New Sector Leaders In The Stock Market: What Does This Signal For The Economy?

by: John M. Mason

Summary

Although the stock market is at about the same level as it was at the end of 2015, there has been a significant change in who investors are picking.

Factors affecting these changes seem to be movements in commodities prices and low interest rates in the first quarter of 2016, but have little connection to stronger economic growth.

Year-over-year performance is still dominated by stocks related to the production of Toys, Tobacco, with Brewers, Distillers and Vintners following.

The stock market today is roughly where it was at the end of last year. The S&P 500 index closed at 2,066 on April 4, and opened around 2,050 this morning. The S&P 500 closed on December 31, 2015 at 2,044.

The Dow-Jones Industrial Index was at 17,425 at the end of last year and closed yesterday at 17,737. The DJIA opened around 17,635 today.

The NASDAQ index closed at 5,007 at the end of 2015 and closed yesterday at 4,892. Today, the NASDAQ opened around 4,857.

The interesting thing is that there has been a noticeable shift in the sectors of the economy that are receiving investor interest. I mentioned this in my March 17 post.

For much of 2015, the Consumer Goods sector and the Consumer Services sector were leading the market in terms of increase in stock prices. My data comes from Barron's Market Laboratory.

This year there has been a dramatic increase in the performance of the Utility sector and the Telecommunications sector. The Consumer Goods sector has dropped from number 1 to number 3, behind these other sectors in both its year-over-year performance and its year-to-date performance. The Consumer Services sector has dropped from number 2 to number 7 in its year-to-date performance and from number 2 to number 5 in its year-over-year performance.

The other main sectors that improved their performance in the year-to-date results are Industrials and Basic Materials.

Although on a year-over-year basis the Basic Materials sector does not show very good results (it was number 9 out of 10 sectors), year-to-date this sector has done quite well.

Furthermore, the top-5 performing sub-sectors in the market are all from Basic Materials and go, from the best performer down to Gold Mining, Non-ferrous Metals, Coal, Platinum and Precious Metals, and Steel.

It seems as if the very strong performance in these sub-sectors have come about due to the very depressed nature of stock prices in the area over the past couple of years. And, this performance has followed commodity price swings.

Gold mining, for example, is up by almost 47 percent, year-to-date, and is up only by 6 percent year-over-year. And, this is true of these other "high performers."

In the Industrial sector, three of the top fifteen performing sub-sectors were Industrial Supplies (number 6 year-to-date), Trucking (number 7 year-to-date) and Marine Transportation (number 12 year-to-date). None of these areas represent an indication of a strong pickup in manufacturing activity in the economy.

The increase in the stock performance of the Utilities sector and the Telecommunications sector represents more the impact of low interest rates than it does any real increasing strength in the US economy.

Year-to-date, the top performing sub-sectors in the Utilities sector are Gas Distribution (number 8), Electricity (number 9), Multiutilities (number 10), and Water (number 14). Primarily an interest rate play.

Year-over-year, the top performing sub-sectors mainly come from the Consumer Goods sector and six of the top fifteen achievers come from this sector. The leader, as it has been all of 2015, has been Toys. Following this sub-sector are Tobacco (number 2), Brewers (number 3), Distillers and Vintners (number 7), Footwear (number 10), and Tires (number 15).

Again, investor choices don't give me a lot of confidence that these people are seeing a very strong manufacturing performance in the US economy, nor an outcome that represents a lot of improvement in labor productivity.

The improvements in hiring that have taken place in labor markets recently have allowed more and more people to return to the labor market and have resulted in more and more people being hired. However, it seems to me that these improved labor market data are not indicative of a faster growing economy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.