John Hussman: Expect Consumer and Tech Sectors to Lose Less Than Others

Excerpt from the Hussman Funds' Weekly Market Comment (2/11/08):

Consumer and technology stocks held up nicely last week, which is early but certainly not conclusive evidence that the pressure on these sectors is abating. After all, a large number of consumer discretionary stocks are currently trading at valuations that implicitly set long-term growth expectations for this sector at about zero.

It tends to be the case that consumer oriented stocks achieve their lows well in advance of broad market lows. My guess is that we haven't reached that point quite yet – but even if stocks are in a bear market, I would expect to see the consumer and technology sectors lose less, over the full course of a market decline, than other sectors. In any event, our own stock holdings are diversified across nearly all sectors except financials, so though we do have greater weights in consumer and technology, it's largely because the weight we aren't allocating to financials has to be invested somewhere else.

Market Climate

... Again, my guess, and it's just a guess, is that a sustained rally – if only a sustained bear market rally – will be more likely a) at the point that investors fully accept recession as common knowledge, so they can start putting “recession” behind them without fear that it's still ahead, or b) at the point the S&P 500 declines a full 20% from its high (anywhere below 1250) – again, so they can start putting “bear market” behind them without fear that it's still ahead. Strangely, the market often responds well when investors recognize that their fears have become reality, because at that point investors can at least begin to believe that the worst is behind them.

That doesn't mean that things won't, in fact, deteriorate beyond a 20% market decline or a shallow and well-recognized recession. But as I've frequently noted, most bear markets are not simply one-way movements. Bear markets typically comprise two, three or more separate 10-20% declines, punctuated by fast, furious rallies. It's easy to forget that the 2000-2002 bear included three bear market advances of 20% from intra-day low to intra-day high, as well as numerous smaller advances, all of which were surrendered in subsequent plunges to new lows.

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