U.S. Equity Market Cheat Sheet (August 22, 2011)
Stock market corrections are always difficult but they also create opportunities. One tried and true method which allows investors to compare similar companies is through relative valuation. This same process can be applied to asset classes. The S&P 500 currently yields about 2.27 percent—that’s higher than a 10-year Treasury bond which yields roughly 2.07 percent. The choice between the two is obvious for long-term investors: Equities.
If one buys the 10-year Treasury today, you will earn about 2 percent a year and get your principal back (barring disaster) in 10 years. However, by investing in stocks today, you will receive more in annual income plus the potential growth and appreciation over that time. Granted, the latter hasn’t always been positive. Just look at the past 10 years of returns for the S&P 500. But that’s been one of the worst periods in history for investing in stocks and it is unlikely stocks will suffer the same fate over the next 10 years.
The average annual total return for the S&P 500 during the 20th Century was 10.44 percent—the strongest period coming during the Tech boom in the late 1990s, research from Citigroup shows. Meanwhile, the total return on a 10-year Treasury bond was 4.68 percent over the same time period. Since 1961, there have been 18 years where the S&P 500 rose more than 15 percent compared to only 13 years of declines.
While it is difficult to predict what will happen over the next year, based on history, the next 10 years should be a lot kinder to investors.
The domestic stock market was lower this week with the S&P 500 Index losing 4.69 percent. The figure below shows the performance of each sector in the index for the week. One sector increased and nine sectors declined. The best-performing sector for the week was utilities which increased 1.90 percent. Other top-three sectors were consumer staples and telecom services. Technology was the worst performer, down 8.03 percent. Other bottom-three performers were materials and industrials.
Within the utilities sector the best-performing stock was PPL, which rose 5.00 percent. Other top-five performers were Ameren, American Electric Power, CMS Energy, and PG&E.
Strengths
- The gold group, represented by its single member Newmont Mining, was the best-performing group for the week, rising 5 percent. The price of gold rose during the week.
- The hypermarkets & supercenters group outperformed, gaining 4 percent for the week, led by its largest member, Wal-Mart Stores. The retailer reported quarterly earnings and revenue above the consensus estimates, and it raised its full-year earnings guidance.
- The tobacco group outperformed, up 3 percent, with the stocks of all four group members increasing. Five tobacco companies are suing the FDA, claiming that the new law requiring graphic warning labels on tobacco products violates their constitutional right to free speech.
Weaknesses
- The tires & rubber group was the worst-performing group, down 19 percent, led by its single member, Goodyear Tire & Rubber. A major brokerage firm downgraded the stock of the tire maker from “Neutral” to “Sell,” saying that it expect the stock to underperform auto peers driven by a second-half moderation in the company’s earnings power.
- The real estate services group underperformed, losing 17 percent on weakness in its single member, CB Richard Ellis Group. The decline was likely caused by investor concern that an economic slow-down would hurt the commercial real estate sales and leasing business.
- The computer storage & peripherals group dropped 14 percent, led by member NetApp. The firm reported fiscal first quarter sales below the consensus estimate, and it guided fiscal second quarter sales below consensus. The firm saw sales weakness in the Federal government and the financial services sectors.
Opportunities
- There may be an opportunity for gain in merger & acquisitions (M&A) transactions in 2011. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
Threats
- A mid-cycle slowdown in the domestic economy would be negative for stocks.
- An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.
