Back to Relative Value

Back some weeks ago I talked about the “oil bubble”. Or more specifically the panic reaction to the political events in the Middle East. Last week I talked about EPS growth of major US economic sectors. Now I want to put it all together and suggest why Consumer Staples (represented by XLP) and Health Care (represented by XLV) is where you should be now.

For the entire first quarter of this year, the only place where you really could make any money was in energy. In fact the Energy sector (represented by XLE), made almost twice the money of any closest runner up.

By the way, it is important to point out that the returns should always be measured against something, more specifically, there should always be a benchmarked that you are trying to outperform. Otherwise you can just passively park your money in the index and passively watch what happens.

In our case we have to use S&P 500 index as a benchmark, or more specifically the ETF equivalent of it, which is SPY. SPY is actually more relevant, because this investment vehicle is what you can actually buy and it also receives dividends.

Relative to the S&P 500 index (i.e. Excess Return), XLE returned over four times of the two closest sectors. In fact, like Matt Hougan said a month ago here, “there have been two markets in the US: XLE and everything else”.

Ticker	Sector	Return YTD	Excess return over SPY
XLE	Energy	11.8%	6.8%
XLV	Healthcare	6.6%	1.6%
XLI	Industrials	6.6%	1.6%
XLY	Consumer Discretionary	5.0%	0.0%
XLP	Consumer Staples	4.8%	-0.2%
XLK	Technology	2.9%	-2.1%
XLF	Financials	2.3%	-2.7%
XLB	Materials	1.8%	-3.2%
XLU	Utilities	1.7%	-3.3%
SPY	S&P 500	5.0%	0.0%
Source: The Rockledge Group

 

Well the XLE glory days are over, for now that is.

The dominance of the energy sector showed a classic fear reaction, where political upheavals overwhelmed any rational or relative valuations. As I stated earlier, what is happening in the Middle East is not over and there may be more bad surprises (unfortunately for the Democracy in the Middle East as well). But things, at least as of the past couple of weeks of this months, have stabilized enough for investors to price in the political risk.

We are back to “normal” valuations, or whatever that might mean in the eye of the investor. More specifically, the energy sector is out of the picture this month and the top performing sectors are Consumer Staples and Health Care.

Ticker	Sector	Return MTD	Excess return over SPY
XLP	Consumer Staples	2.0%	2.9%
XLV	Healthcare	1.0%	1.8%
XLY	Consumer Discretionary	0.3%	1.1%
XLF	Financials	-0.7%	0.2%
XLK	Technology	-0.8%	0.0%
XLU	Utilities	-1.0%	-0.1%
XLI	Industrials	-1.8%	-0.9%
XLB	Materials	-2.6%	-1.7%
XLE	Energy	-4.7%	-3.8%
SPY	S&P 500	-0.9%	0.0%
Source: The Rockledge Group

 

The Energy sector is way down. This “dramatic” reversal is not magic, nor should have been unexpected. The stability is mostly back and the focus is back on our own domestic economy.

So what does it mean for now? Despite the talks about recovery and seemingly better job reports, the returns clearly show the investor valuations and near term sentiment. It is no longer fear of foreign turbulence, but it is fear of the near future of our domestic economy. We have two of the most defensive sectors that are showing solid monthly Excess Returns