Everyday I try to discern the “message of the markets” by looking at the performance of the various sectors: financials, consumer staples, consumer discretionary, technology, energy, basic materials, industrials, health care and utilties.
Checking up on the sectors today revealed something interesting.
The financials have been leading the market down recently as everybody knows.
Hedge funds with exposure to subprime mortgage backed bonds have been blowing up. The market for mortgage securities has frozen up putting a damper on the operation of mortgage banks and the investment banks who securitize their loans. Investors appetite for the junk bonds and loans that have financed the LBO boom has dissipated bringing to a standstill the business of private equity firms – and hurting the business of investment banks who get fees for advising on these deals and selling the debt.
But not today.
Today, it is the stalwarts who have led the market higher this year despite the headwind from the financials and housing: energy, basic materials and industrials.
Check this out (as of 1:30pm EST, Thu 8/16):
S&P Financials (XLF): -.25%
S&P Energy (XLE): -3.44%
S&P Basic Materials (XLB): -4.61%
S&P Industrials (XLI): -3.43%
So, today, it’s a new group of stocks leading us down: the “global boom” stocks. Relatively speaking, financials are outperforming. The other 5 sectors (staples, discretionary, tech, health care and utilties) are pretty much moving with the market.
What does this mean?
Well, all this time the bulls have been saying that US growth will be counteracted by growth around the world i.e. the global boom. This was the them of a front page WSJ article from May 23 entitled “Why Market Optimists Say This Bull Has Legs: They See Decade of Gain Fed by Global Growth; Skeptics Cite Big Doubts” (subscription required). It was the theme for a recent Fortune Magazine feature “The Greatest Economic Boom Ever” (first published July 12) by Rik Kirkland. It was the them of a July 31 Financial Times editorial by Ed Yardeni “Global boom faces first major stress test”.
Out of all of these I highly recommend Rik Kirkland’s excellent and nuanced Fortune Magazine piece. And it’s worth pointing out that while he’s bullish on the global economy long term, he’s bearish short term:
…. if the US goes into recession, can’t the rest of the world keep chugging? That day may come, but it’s not here yet. As the world’s champion buyer of last resort, the US consumer right now remain the global economy’s broad shouldered, albeit increasingly weary, Atlas. If Atlas shrugs…. look out below.