Since the market’s March 9 low, stocks and exchange traded fund (ETFs) have more or less stabilized and the fear has abated. But some have noticed interesting things about this recovery: it’s not proceeding exactly according to plan.
Corporate earnings are on the up, with upgrades exceeding the amount of downgrades in many markets for the first time in recent memory. Now, the market has been more focused on improving trends. Sectors that suffered from the sharpest falls stand to benefit the most from the economic recovery. Sectors like industrial cyclicals, financials, small-caps and commodities have all been performing above the market norms, remarks Stephanie Butcher for FT Adviser.
However, cyclical sectors don’t always lead the market. For instance, in between 1994 and 1999, cyclicals underperformed a rising market, with defensive sectors such as consumer staples, health care and utilities leading the way. Like that period, most cyclicals look fully valued and “defensives” look cheap on an absolute basis. [Why you shouldn’t listen to ETF Nostradamuses.]
The current situation has given rise to a market oddity in that some companies trade on significant price/earnings ratio discounts to that of the market and historic premiums compared to dividend yields. The market is also discounting a recovery in cyclically sensitive earnings – around 40% earnings growth is needed to bring cyclical price/earnings back to normal levels.