John Hussman: We're Overweight Consumer Stocks, Tech and Healthcare

Excerpt from the Hussman Funds' Weekly Market Comment (1/28/08):

Government stimulus package

Before enacting a “stimulus package,” it would be helpful for Washington to recognize that a policy that loosens a particular constraint is only effective if that constraint was previously binding on the behavior of individuals or companies... For most families, the most binding constraint right now is not the ability to spend out of current income, but the ability to service debt. A temporary boost to current income is likely to be spread out in a way that best allows that family to operate under its constraints, which means that the predominant use of this “stimulus” will be for debt service. This may very well provide the economy with a modest reduction in credit strains, but it certainly won't avoid delinquencies and foreclosures... Outside of bailing out credit institutions and creating a huge moral hazard problem down the road, there's not a whole lot that will solve the problems except time and writeoffs...

In any event, we can expect that however the “fiscal stimulus” is spent, we will observe an increase in the U.S. federal deficit, as well as an increase in the U.S. current account deficit (or at least a smaller decline than we typically observe during recessions)... [and most likely] some amount of increased demand for durable items such as consumer electronics, computers, and home improvements.

Market Climate

... The [Strategic Growth] Fund currently has intentional overweights in sectors including consumer stocks (including consumer discretionary), technology, and healthcare. The Fund has less weight in financials and industrial cyclicals than the indices we use to hedge (primarily the S&P 500, the Russell 2000 and the Nasdaq 100)... Importantly, we observe a great deal of dispersion even within individual sectors, so among technology and consumer stocks, for example, many stocks reflect very favorable combinations of valuation and market action, while others appear almost ridiculously overvalued.

... it may be helpful to know that behind the two “knee jerk” defensive sectors – consumer staples and healthcare – the next best performing sectors during recessions since 1973 have been consumer discretionary and information technology... In contrast to 2000-2002, which was a terrible period for the hypervalued tech group, and a period where our exposure to that sector was virtually nonexistent, my impression is that technology stocks are currently a very appropriate area to moderately overweight...

In bonds... it appears unlikely that long-term Treasury investors will ultimately be willing to sustain a 3.5% yield to maturity over the next decade. So there is undoubtedly an element of “speculation” in the Treasury market, based on the lack of default risk. That prevents us from taking more than a short-duration exposure of about 2 years in this market, still mostly in TIPS.

Editor's note: Relevant sector ETFs include the iShares Dow Jones U.S. Consumer Goods Sector Index Fund (IYK), iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH), Consumer Discretionary Select Sector SPDR ETF (XLY), Consumer Staples Select Sector SPDR ETF (XLP), Health Care Select Sector SPDR ETF (XLV), Technology Select Sector SPDR ETF (XLK), Vanguard Consumer Discretionary ETF (VCR), Vanguard Consumer Staples ETF (VDC), Vanguard Health Care ETF (VHT), Vanguard Information Technology ETF (VGT). Seel also the full list of sector ETFs.