Now that February is over, we have two months of returns on stocks, bonds and commodities. Since we know sectors of the stock market perform well in bull and bear markets, we can compare what has happened so far in 2016 with the typical bull and bear market patterns. Generally, bull markets are led up by strong Financials, Industrials and Technology. These perform badly in bear markets, though, while defensive sectors, such as Utilities and Consumer Staples have the superior returns. Precious metals and bonds also tend to outperform any stock sector in meltdowns.
One year ago at the beginning of March, when the bull market that began in March 2009 was still unquestionably rising, five stock sectors were outperforming the S&P 500 (in order):
- Consumer Discretionary
- Information Technology
The Consumer Discretionary sector also tends to do well in bull markets, so it is not surprising that it's on the list. What is surprising, is that Healthcare was outperforming since it tends to be a defensive sector, which is good for bear markets. The switch occurred because Healthcare includes biotech stocks and these were in a bubble the last few years. The strong performance by this group of stocks was telegraphed by the market as early as 2008 when four of the five top performing equity ETFs (XPH, XBI, PJP, and IBB) in the market trouncing that year held pharmaceutical or biotech companies (even these ETFs were down, just by less than all the others).
While no equity ETFs had positive returns in the 2008 bear, there were commodity and bond ETFs that did. Three commodity ETFs (IAU, GLD, DGL) which made investors money respectively held gold, gold and gold. The fourth best performing commodity ETF (DBP), which had a slightly negative return, had a portfolio of precious metals that included gold. Do we see a pattern here?
The biggest returns in 2008 were in bond ETFs, however (this is not likely to happen again because bonds have entered a major global bubble since then and this has created negative interest rates in Japan and ten European countries). The five bond ETFs with the greatest returns (all over 20%) in 2008 were: EDV, TLT, TLO, PLW and TLH. These all had at least some or all of their holdings in long-term Treasuries.
So what does stock sector performance look like in the first two months of 2016? With the S&P DOWN around 4%, the best performing non-leveraged ETF is GDX, which holds gold mining stocks. It's UP 41.3%. Gold itself is up around 16%. All five of the best-performing bond ETFs in 2008 are also up. The top performing equity groups are all defensive plays: Utilities, Telecom, and Consumer Staples (take a look at the ETFs: XLU, VOX-OLD, and XLP). Here is the order of top performers for 2016 so far:
- Gold/Gold Mining
- Consumer Staples
Doesn't look anything like the bull market list from one year ago does it? In fact, asset returns in the first two months of 2016 are about as similar to a bear market picture as could be expected. On the flip side, the stalwarts of the bull market are performing around the level of the S&P 500 (Industrials and Consumer Discretionary), somewhat below it ( Information Technology and Healthcare),or well blow it (Financials). Within Healthcare, Biotechs are being devastated and are down 30% or more (see IBB and XBI). Financials are weak across the board, never a good sign for the stock market, with drops around 15% in Banking (KBB), Financial Services (IYG), European Financials (EUFN) and Global Financials (IXG).
The market is sending investors a clear message about what shape it is in and it doesn't require complex formulas or technical analysis to determine what it is saying (although these can help). All the average investors has to do is pay attention to sector performance and see what is doing well and what is doing poorly and adjust their investing strategy to go along with the what the market is telling them.
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.