Dissecting the Bear

Since May 5, the S&P 500’s market value has fallen by $807 billion. That’s a nice chunk of change. Percentage-wise, it comes to -6.74%.
What’s interesting to note is that since the stock market peaked, long-term interest rates have actually declined. Gold is down by $100 an ounce. This is not a market worried about inflation. If we use some reasonable assumptions, in just five weeks, the market has become convinced that around $50 billion of next year’s corporate profits will not materialize.
The Big Bad Bear, however, hasn’t treated everyone equally. Here’s the performance of the 10 industry sectors since May 5:
Utilities………………..+0.78%
Staples………………..-1.61%
Telecom………………-2.00%
Health Care………….-2.28%
Financials…………….-5.60%
Discretionary……….-5.68%
Industrials……………-8.71%
Energy………………..-11.41%
Tech…………………..-12.12%
Materials…………….-13.30%
Two observations. First, it’s almost the mirror image of the market before May 5. The other is that it’s a pretty wide gap. The bottom three groups, combined, make up just 27% of the S&P 500’s value, but have contributed more than half the losses. The rest of the market has suffered nary a scratch.
So is this a major turning point? A new period of leadership for defensive stocks? It’s hard to say. These turning points don’t make their appearances widely known. Afterall, the energy stocks have been outperforming the S&P 500 for over seven years, and materials stocks have been ahead of the index for nearly six years. The trends last a long time.
The two major defensive sectors, staples and health care, have been almost completely ignored by the bull market. Since mid-October 2002, the health care sector is up 7.2% and staples are up 10.9%, while the S&P 500 has grown by 38%.
A month ago, the market was beginning to think that the Fed would hold off raising rates at the end of June. But now, it’s convinced that another rate hike is coming. Interestingly, the yield on the 30-year T-bond now closely follows the price of oil. The correlation is up to 80%, which is a 15-year high.
Today, the PPI report showed that wholesale prices rose 0.2% in May. The core rate was up 0.3%, slightly above expectations of a 0.2% increase. Gold is below $600 an ounce, and copper has lost 13% in the last four days.
While the market is somewhat concerned about inflation, the main reason for the correction is a growing concern about the health of the economy.

Posted by Eddy Elfenbein on June 13th, 2006 at 7:28 am

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