Tech, Telecom Sectors Lead New Year’s Market Rally
It’s a new stock market for a new year: Investors have rushed back into many downtrodden technology and telecom stocks this year, while taking profits in many of last year’s market leaders such as utilities and drug stocks.
The turnabout has lifted some tech and telecom shares 20% or more in three weeks, though the market took a breather Monday with major indexes closing little changed. The Nasdaq composite eased 0.5% to 2,757.91, though it’s still up 11.6% year to date.
Could the early action mean that stocks have finally hit bottom--and that old-style “momentum” investing may be staging a comeback on Wall Street?
“The laggard issues tend to rally most [after] a market bottom, and this is the kind of sector rotation typical of a bottom,” said Gary Anderson of Eugene, Ore., an advisor to portfolio managers and a follower of technical market trends.
“But who knows whether this is a genuine bull move? For one thing, there is a lot of ‘overhead’ supply from people locked in with losses,” he said.
Overhead supply refers to shares bought at higher prices that investors may be waiting to sell as stocks rebound. Such supply can thwart a rally as sellers overwhelm new buyers.
The threat of heavy selling by tech investors who are underwater is a key reason most analysts aren’t looking for a return to the go-go momentum market that ended with spring’s Nasdaq crash.
Analysts also note that abrupt sector shifts early in any year aren’t necessarily reliable clues about the longer-term trend.
“January is often the most confusing period because there are all kinds of crosscurrents going on,” said Bob Doll, portfolio manager at Merrill Lynch, pointing to bargain-hunting in the previous year’s downtrodden sectors and the aftereffects of fourth-quarter tax-related selling.
Analysts say whatever momentum the market musters this year is likely to be far more subdued than the tech surge of 1999 and early 2000.
“Investors learned a lesson from last year’s difficulties,” said Al Goldman, chief market strategist at brokerage A.G. Edwards. “They’re going to be more selective, more value-conscious.”
Still, market bulls say classic growth sectors such as tech could have a strong 2001, in large measure because of lower interest rates. Historically, tech does well when rates are falling.
Indeed, much of the market’s trend this year can be traced to the Jan. 3 surprise move by the Federal Reserve to cut its key short-term interest rate half a point to 6%, analysts say.
“People started saying, ‘Maybe the bottom is here. Maybe it’s time to jump into the interest-rate-sensitive stocks,’ ” said Sam Stovall, a strategist at Standard & Poor’s Corp. in New York.
With the rate cut, communications and technology shares and consumer “cyclical” companies (such as auto makers) started to move higher at the expense of utilities, energy and health care--sectors that had surged in 2000 in part because investors were looking for safer havens.
“Those sectors that did well after Labor Day are now a source of funds for those that did poorly,” Goldman said.
Some experts say last year’s winners might have sold off early in 2001 even without a rate cut as investors simply opted to take profits.
After all, “when was the last time you heard utilities went up 53%, as they did last year?” Stovall said.
But many investors may just be following historical precedent: Since 1971, the tech-heavy Nasdaq composite index has on average outperformed the blue-chip Standard & Poor’s 500 index in the first six months after the Fed has begun to cut rates.
On average, the Nasdaq has been up 15.7% six months after the first rate cut, while the S&P; has gained 12.3%, according to Stovall’s research.
Stock sectors within the S&P; 500 that have done best after a Fed credit-easing cycle has begun have been consumer “staples” companies (such as makers of household products) and tech, with average gains of 16.2% and 15.2%, respectively, for those groups.
So far this year, the S&P; 500 tech sector already is up 17.8%, though the consumer staples sector is down 0.4%. The S&P; as a whole is up 1.7%.
Meanwhile, the utility and energy sectors have risen the least historically in times of falling interest rates. Their six-month average gains in falling-rate environments have been 9.1% and 9%, respectively.
So far this year the utility and energy sectors within the S&P; are down 13% and 6.4%, respectively, after hefty gains last year.
Surprisingly, the financial stock sector in the S&P; 500 is down 3.3% year to date.
Although financial stocks might seem ideal investments in a credit-easing environment, Stovall said they typically “move early,” running up in advance of rate cuts--just as they did in last year’s fourth quarter--then basically track the broad market.
During the last 30 years, the strongest individual industry groups in times of falling rates have been waste management (average six-month gain after the first rate cut: 31.4%), drugstores (26.5%) and broadcasting (24.7%).
The weakest performers have been can and bottle makers (up 3.8%), electric utilities (4.9%) and domestic oil exploration and production companies (5.8%).
Of course, every market cycle is different in some ways, and there’s no guarantee that the past will predict the future.
Stovall said that though consumer staples companies--those that sell “eat ‘em, smoke ‘em, drink ‘em” products--often are considered “defensive” stocks, they tend to fare well in a credit-easing environment because of initially fragile market psychology.
“Of the two emotions investors have, fear is more of a motivator than greed,” he said. “So if investors have just been pounded for the last six months, they may not be willing to dive in with both feet and buy the most aggressive stocks” but rather will look for somewhat safer ideas early on.
Partly for that reason, Stovall said S&P; continues to favor defensive stocks for the first part of this year. He said the tech sector may see its best gains later in the year, as the Fed’s rate-cutting medicine starts to perk up the economy.
Goldman of A.G. Edwards said he looks favorably on tech, including some stocks in the Internet group, but he also favors such traditionally defensive sectors as insurance and drugs. With the declines in those sectors this year, investors who like them for the long term are getting an opportunity to buy in cheaper, analysts note.
Despite the historical numbers during periods of credit easing, some analysts also see a bright 2001 for energy stocks, thanks in part to a business-friendly Bush administration.
Stovall prefers smaller and medium-sized energy firms to the bigger names. His picks include energy services firms such as BJ Services (BJS) and UTI Energy (UTI).
Meanwhile, some analysts expect smaller stocks in general to continue to outperform larger stocks this year, as they did in 1999 and 2000.
Prudential Securities analyst Steven G. DeSanctis noted in a recent report that cycles of small-cap stock dominance have lasted nearly six years on average, starting with the 1932-37 period. He also said relative valuations still make smaller stocks look attractive.
So far this year, the S&P; small-cap 600 index is up just 0.7%, trailing the S&P; 500. The S&P; mid-cap 400 index is down 2%.
Air freight and telephone companies have been the strongest groups in the S&P; small-cap index this year, with gains of 93.8% and 92.7%, respectively. But those small-cap sectors contain just one stock each.
Particularly strong small-cap stocks have included home builder Champion Enterprises (ticker symbol: CHB), up 136% this year; gene therapy specialist Advanced Tissue Sciences (ATIS), up 110%; and computer equipment maker Sonicblue (SBLU), up 97%.
Health care dominates the list of worst-performing sectors among small-stock groups this year, as investors have cashed in profits from last year.
In the S&P; mid-cap 400 index, strong groups this year include electronic component makers, up 18.3%, and apparel producers, up 18.1%. Leading mid-cap stocks include Internet security specialist Network Associates (NETA), up 97%; network software maker Legato Systems (LGTO), up 92%; and data-processing manager Informix (IFMX), up 72%.
Laggard mid-cap groups include makers of automated transaction systems, down 19.7%, and health services firms, off 18.9%. Weak mid-cap stocks include Web design specialist Macromedia (MACR), down 44.6%; data-processing firm SEI Investments (SEIC), off 34.9%; and in the volatile biotech area, Protein Design Labs (PDLI), down 33%.
Among blue-chip stocks, long-distance telecom leads the S&P; industry groups with a gain of 42% so far this year after last year’s crash. AT&T; and WorldCom both have resurged, though they remain far below their peak prices.
The second-biggest sector winner in the S&P; 500: entertainment, up 31.5%.
Electric utilities and defense electronics firms are the weakest groups in the S&P; 500 so far, each with losses of 14.8%. Not surprisingly, laggards include two companies ravaged by the California energy crisis: PG&E; (PCG), down 51.3%, and Edison International (EIX), off 42%.
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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.
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More Inside
Sector Shifts: Best and worst industry groups year to date in key S&P; indexes, C6
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Stock Sector Trends, by S&P; Index
Here are the 10 best- and 10 worst-performing stock industry groups so far this year within each of three key market indexes: the blue-chip Standard & Poor’s 500, the mid-cap S&P; 400 and the small-cap S&P; 600. Performance is measured through Monday’s market close. In general, last year’s losers have been this year’s leaders, at least so far. The leading market groups are dominated by tech and telecom. On the flip side, the losers so far this year are many of the sectors that were hot last year, especially in the health-care, energy and utility areas.
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Source: Bloomberg News
Wall Street, 2001: The Big Picture
Here’s a look at the winners and losers so far this year among the 11 broad stock groups in the blue-chip Standard & Poor’s 500 index. Technology and telecom sectors are leading after plummeting in 2000. Meanwhile, investors have been taking profits in some of last year’s hottest sectors, including utilities and health care.
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S&P; 500 sector YTD pctg. change (through Monday) Technology +17.8% Communications services +14.7% Consumer cyclicals +3.7% Consumer staples -0.4% Transportation -0.7% Capital goods -2.6% Financials -3.3% Energy -6.4% Basic materials -7.8% Health care -9.2% Utilities -13.0% S&P; 500 index +1.7%
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Source: Bloomberg News
