By Marc Hubert
Sectors of the market that generally do well at the end of bear markets lag
It’s still a bear market, according to the relative strength ranking of the US stock market sector. This is because the sectors that generally do best at the end of bear markets have been lagging lately. Conversely, sectors that usually do the worst at the end of bear markets have outperformed. This is not what we would see if this bear market lived up to historical standards.
This does not guarantee that we remain in a bear market. Indicators are mixed, with some suggesting a bull market has started at the October lows and others indicating the bear market is alive and well. That’s why analysts spared no effort in searching for additional clues.
According to data from Ned Davis Research, the S&P 500 sectors that have outperformed most consistently over the past three months of bear markets are Communication Services, Consumer Staples, Health Care and Utilities. The firm based this conclusion on an analysis of 14 bear markets since the early 1970s. Each of these four sectors outperformed the overall market in 13 of those 14 bear markets.
Unfortunately for those who believe the bear market ended at the Oct. 14 low, these sectors were not at the top of the performance charts in the three months leading up to that point. In fact, three of the four were lagging the market, according to FactSet data. Healthcare was the only one of the four to outperform the market during this three-month period.
A similar story is told by the sectors that most often lagged the overall market at the end of past bear markets, as you can see in the chart above. Consider the industrials sector, which in the last three months of the 14 bear markets since 1970 has lagged the S&P 500 in 12 of them. Still, this sector was one of the best performers in the three months leading up to the Oct. 14 low.
The financials and materials sectors almost as consistently as the industrials sector have underperformed the S&P 500 in the last three months of past bear markets – each lagging in 11 of the last 14, the data shows. by Ned Davis Research. Yet, like industrials, these two sectors outperformed the market in the three months leading up to the Oct. 14 low.
Consumer Discretionary vs Consumer Staples
Another sector index that analysts pay attention to is the relative performance of the Consumer Discretionary and Consumer Staples sectors. The former contains businesses that tend to do well when economic times are good, while businesses in the second sector produce essential products that consumers need to buy even when times are bad.
Not surprisingly, the Consumer Staples sector tends to outperform the Consumer Discretionary sector during bear markets. But that quickly reverses at the start of a new bull market. This is when investors start to feel that the worst is behind them and they start to favor consumer discretionary stocks which should do well in the coming months.
This helps explain why there was a surge of bullish excitement over the last two weeks of November. During this period, for example, the Consumer Discretionary Select Sector SPDR (XLY) easily beat the Consumer Staples Select Sector SPDR (XLP) by a margin of 5.2% to 1.9%.
But this outperformance did not last. So far in December, the Consumer Discretionary sector has given up all of that outperformance, and more.
The bottom line? The sector’s relative strength ranking suggests that the bear market is still here. This does not guarantee that the US market’s October lows will be broken. But if you want to believe that we are in a new bull market, you will have to find reasons to support your belief other than the relative returns of the sector.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at firstname.lastname@example.org
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