What a difference a year makes. Whereas the first quarter of 2009 was a bloodletting -- the S&P 500 hit its crisis low on March 9 -- stocks just turned in their best first quarter since 1998. But don't let that rosy statistic lull you into complacency; there is no shortage of reasons for investors to remain extremely vigilant right now.
Sectors: Winners and losers
Let's take a look at the best and worst-performing sectors in the S&P 500 for the year through April 1:
|
Top 3 S&P Sectors |
Year-to-Date Return* |
|---|---|
|
Industrials |
12.5% |
|
Financials |
10.9% |
|
Consumer Discretionary |
10.1% |
|
Bottom 3 S&P Sectors |
|
|
Energy |
1.1% |
|
Utilities |
(3.4%) |
|
Telecom Services |
(4.8%) |
Source: Standard & Poor's.
That two of the three best-performing sectors were cyclical (industrials, consumer discretionary) and two of the three worst-performing sectors were defensive (utilities, telecoms) is consistent with -- and reinforces -- the notions that the economy has exited recession (true) and is now in a conventional recovery (false). (Similarly, small- and micro-cap stocks also outperformed the broad market in the first quarter, with gains of 8.9% and 9.9%, respectively).
Don't overpay to bet on a recovery
Even if you believe we are in a conventional recovery, that is no justification for overpaying for cyclical stocks. As I mentioned last week, according to David Rosenberg, head strategist at asset manager Gluskin Sheff, cyclical stocks are pricing in levels of economic activity that are well ahead of current trends. Here are seven stocks -- six of which are cyclical -- that look like they may be overbought and overvalued:
|
Year-to-Date Return |
Price-to-Earnings* |
|
|---|---|---|
|
Ford Motor |
36% |
9.0 |
|
Whole Foods Market |
32% |
26.9 |
|
Wynn Resorts |
32% |
73.6 |
|
Abercrombie & Fitch |
28% |
19.4 |
|
Akamai Technologies |
25% |
22.7 |
|
JDSU Uniphase |
45% |
25.7 |
|
priceline.com |
17% |
19.5 |
*Based on next fiscal year's earnings.
Source: Capital IQ, a division of Standard & Poor's as of April 6, 2010.
Two separate, sensible strategies
The two most reliable indicators of value, the cyclically adjusted P/E ratio and Tobin's q ratio, both suggest U.S. stocks are overvalued. In that context, sensible investors can follow one of two strategies: Index/asset allocation-oriented investors should underweight U.S. stocks; meanwhile, investors who prefer to own individual stocks should ensure that those stocks are no more than fairly valued.
Between high valuations and slow growth, investors should expect disappointing returns from U.S. stocks over the next several years. Tim Hanson explains how to make more in 2010.
