Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
EQ: With 2011 just about wrapping up, it looks like the market will finish relatively flat from where we started the year, barring any huge moves in the next few days. How does 2011 compare historically in terms of market performance?
Stovall: Historically, it actually ranks up there with 1947 as the only time that the third-year of a president’s term in office since World War II has been close to a zero-percent gain. Back then, we had a zero-percent move, but at the same time, we gained 5.5 percent in dividend yield. So we ended up with a more than 5-percent total return.
This time around, it really looks like we might end up going nowhere in terms of price, and even if you add back dividends, at most we’re eeking out about a 2-percent total return. It’s better than a negative return, and as of now, 2011 looks to join the 12 other times since 1926 that the S&P 500 gained between zero percent and 10 percent on a total return basis.
EQ: It seems like 2011 really paid off for investors of defensive sectors and dividend paying companies. Which sectors were the best and worst performers for 2011?
Stovall: You’re correct that defensiveness was the way to go in 2011. I don’t think anybody really would’ve predicted that Utilities, Consumer Staples and Healthcare would do well, and at the same time, all post total returns in excess of 13 percent. Year-to-date through Dec. 23, we had Utilities up 19.4 percent; Consumer Staples up 14.4 percent; and Healthcare up 13.2 percent. These are the traditional defensive sectors that hold up well on a relative basis whenever the market goes through challenging times. Usually, they just end up falling less than the overall market, so it is a surprise to see the three best performing sectors up more than 10 percent and then to find out that they were defensive in nature.
The worst performing groups were two that posted total return declines. Financials were the worst, down 16.0 percent; and Materials was down the second worst, declining almost 9 percent. Industrials was the other sector that underperformed the S&P 500, gaining only 0.3 percent but at least eeking out a slight advance.
EQ: Do you see this trend repeating in 2012? Could defensive sectors again outperform the market?
Stovall: I don’t think that that is likely to be the case. Even in 2000, when you had Utilities, Healthcare and Consumer Staples among the best performing groups while the S&P 500 was down 9 percent, in the following year when the S&P 500 was down 12 percent you, had Materials, Consumer Discretionary and Industrials as the best performers. What ends up being the best one-year performer does not usually end up being at the very top again. It might outperform the S&P 500 on the whole, but usually you don’t see the same sectors be the leaders two years in succession.
My belief is that in 2012, heading into the year, there’s going to be a lot of skepticism and a lot of worry by investors. But as the year progresses, we will likely see the outlook for 2012 and 2013 become more clear. I would tend to say we’re either going to get a bad year or a very good year, but probably not a repeat of what we had this time. If the 8-percent forecast for 2012 S&P 500 EPS holds up and valuations remain fairly attractive, and if alternative investments like cash and bonds continue to yield very little, investors might gravitate toward stocks if, certainly, we can avoid a deep recession in Europe.
EQ: In your most recent Sector Watch reporter, you mentioned the January Barometer. Can you talk more about the indicator and how investors might use it to gauge the market?
Stovall: Yes. There are two things called the “January” somethings. One is called the January Effect, which really is an indication that small caps tend to outperform large caps in January. What we’re finding, however, is that investors are getting a jump on that January Effect and showing an improvement in performance for small caps in December as compared to January.
Then there’s the January Barometer, which is totally different. It indicates that, as goes January, so goes the year. It’s something I first read about in the Stock Trader’s Almanac. Basically, January is an early warning signal for not only the market but also for sectors in general. Since World War II, whenever the S&P 500 has been up in January, it was up for the full year an average of 88 percent of the time. Also, what’s interesting is that the average price change during that calendar year was a gain of 15.7 percent for the S&P 500.
Basically, if January does well, then the odds favor the entire year doing well for the overall market. As of Dec. 23, the S&P 500 was up about 1 percent on a price basis, and better than that on a total return basis. So it seems as if at least the frequency of the January barometer being correct will remain intact, even though the average price change will be a lot weaker this year than it has been on average. So look to January of 2012 and if we end up with a positive performance, then that is an early warning signal that we could end up with a good performance for the entire calendar year.
EQ: Any other closing thoughts as we prepare to close out 2011 and head into 2012?
Stovall: As we head into 2012, there are still some macro overhangs that have yet to be resolved, and probably won’t get resolved in the near term. In particular, there’s the European sovereign debt situation, as well as just debt overhang on a sovereign, state, local as well as personal level around the globe. It’s not just Europe that has all this debt; it’s the U.S. as well, and as a result I don’t see that as something that will be going away any time soon.
We might end up climbing the wall of worry in 2012, and so I would tend to say that while we think the market is likely to do better in the coming 12-month period, I really wouldn’t be risking an awful lot, mainly because it could go either way. Therefore, there’s no reason to risk the money you have worked so hard to squirrel away by trying to take a stance that’s too aggressive only to find out that 2012 will end up being a disappointment.
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