Tuesday, July 21, 2015

Where's The Performance Coming From?

Convergex's Nicholas Colas is out this morning with some interesting data on what's driven the market higher so far in 2015:

"You don’t hear it much, but the S&P 500 has been a bit of a “One trick pony” in 2015. No, it isn’t the 4% weighting in Apple that makes it such; it is the combination of a 15% weighting in Health Care AND that sector’s 12.9% return year to date.  When you compare the S&P 500’s price return year to date of 3.37%, you can see that the Health Care sector’s contribution is essentially just over half the market’s price return for 2015 (12.9 times 15% is 1.90 of that 3.37). Layer on the fact that 5 of the 10 industry sectors in the S&P 500 are still down on the year: Materials (-2.7%), Industrials (-2.9%), Telecomm (-0.7%), Utilities (-8.6%) and Energy (-9.7%).

So what happens when Health Care stops being such a strong performer or simply hits a valuation or fundamental pothole?  The simple answer is that other sectors have to step in with better performance, or the U.S. equity market will stumble, well, like a pony after its one trick. Two sectors have the potential to be that support, both by dint of their weighting in the index and recent performance.  Financials (17% weighing) may only be up 2.8% on the year, but over the last 3 months their performance is better – up 4.9%. Promises of a steeper yield curve and a better U.S. economy are the tailwinds there.  The Technology (20% weighting) sector is doing a little better YTD, up 5.6%, but has really hit its stride in the last 5 days, up 3.8%, on the back of positive earnings from the likes of Netflix and Google."


The chart below, which is something we frequently reference in our weekend market reviews, further summarizes Mr. Colas' commentary.  Here we're looking at a year-to-date performance chart of the various SPDR S&P Sector ETFs.  While there's some variation in the performance numbers he references, the larger points remain.  Health Care has been the clear leader through the first half of the year and if that sector stumbles in the coming months the market will need other sectors to pick up the slack if we're to build on these gains.

Health Care stocks were one of the few reasons that the S&P finished just barely positive through the year's first 6-months.  They've gotten some help of late as Technology stocks (Netflix, Google, Amazon, Facebook, etc) have perked up in recent weeks.  They were especially strong last week and have helped push the S&P to a 3% gain so far in July.

You've heard some chatter during this sideways market that there was money to be made if you were a stock picker and that's been true to a degree.  You certainly helped yourself if you were able to target companies within the stronger sectors mentioned above.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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