A strong start in the stock market in 2013 has cheered
investors weary of the fiscal cliff doom and gloom during the
holidays, and MoneyShow's
Howard R. Gold
, also of
examines the sectors that will lead the next leg up.
Stocks have moved up smartly since the New Year's Eve rally
began, and though they've paused a bit over the last couple of
days, they appear to be heading higher still.
Last year's leaders - especially consumer discretionary and
financial stocks - are still setting the pace, suggesting that the
economy will continue to grow in 2013, as housing recovers and auto
sales stay strong.
But as the year progresses, I expect those early-cycle plays to
pass the leadership torch to stocks that do best later in an
economic recovery. We may even be coming to the end of the massive
rally in homebuilders and similar stocks that has produced such
phenomenal gains since the market bottom of early 2009.
Sam Stovall, who follows sectors - and market history - closely
in his role as chief equity strategist at Standard & Poor's
Capital IQ, thinks a change in leadership may be in the works, most
likely later in 2013.
"We are starting to move from the early cycle to the mid-cycle
performers," he told me. That means sectors like industrials and
materials stocks could be the leaders of the bull market's next
Right now, he thinks last year's leaders - the S&P
financials (up 28.8% in 2012) and consumer discretionary (up 23.9%)
sectors - will remain leaders through spring. Why?
Because the first four months of the calendar year generally see
consumer discretionary and financial stocks outperform.
As the year rolls on, he thinks "a movement into materials and
industrials would be consistent with a shift from the early-cycle
performers to the mid-cycle performers."
"The materials," he continued, "are starting to move, as are the
industrials. The financials may have a little life left in
But they and consumer discretionary stocks have come a long,
long way in the rally that started in fall 2011 and even further in
the bull market that celebrates its fourth anniversary this
The Sector SPDRs covering consumer discretionary stocks and
financials have risen over 100% and 90%, respectively, from their
recent lows in August-September 2011, and have both about tripled
since the market bottom of March 2009. Some homebuilders and
retailers have gained 500% since the 2009 market trough. To say the
easy money has been made in these stocks is an understatement.
Meanwhile, the bull market is getting a bit long in the tooth.
According to InvesTech Research, the average bull market in the
S&P 500 has been 3.8 years, while the mean has been 3.6. We've
hit both already.
But there's another wrinkle. Stovall says we may have
experienced a brief bear market in 2011, and that may help
determine where stocks go from here.
From April to early October 2011, the S&P lost 19.5% (based
on closing price) and dropped as much as 21.5% intraday. Midcaps
and small caps fell 25% while international markets tumbled 30% -
bear market territory by any definition.
But Stovall called it either a severe correction or a "baby bear
market," which occur when the S&P loses 15%-25% over a few
months. But then the market recovers quickly, producing "an average
[gain] of 31.7% a full year after these market declines had run
In that report, published October 31, 2011, he wrote that
"should history repeat itself… the S&P 500 would eclipse 1450
by this time next year."
It actually took 14 months to get there, but hey, it was a great
call. He's looking for the S&P to reach 1600 this year.
Here's why this history matters now: Recoveries from baby bears
generally run their course in two years, which means this latest
move could be over towards the end of 2013.
The Federal Reserve's easy money policy may have thrown a monkey
wrench into "normal" market cycles, and looming over the next few
weeks are three more fiscal hurdles Congress must clear - automatic
spending cuts, the debt limit, and the end of the current budget
resolution that keeps the government open.
If you're an active investor and you think that won't have a
long-run impact, you might consider shifting some "mad money" (the
10% or 20% of your holdings not in low-cost, diversified index
funds) from financials and consumer discretionary stocks into the
materials and industrial sectors.
are the easiest way to do it, through the
Materials Select Sector SPDR
) and the
Industrial Select Sector SPDR
If you insist on buying individual stocks (which I don't
recommend), Stovall says industrial
) and materials stock
) are good choices.
Trinity, a mid-cap value stock, could see a boost in demand for
the rail cars it manufactures if the economy continues to recover.
S&P's analyst expects earnings to rise 20% in 2013, while the
stock changes hands at less than 12x estimated 2012 earnings of
$3.13 a share.
Rio Tinto, headquartered in London, mines aluminum, copper,
gold, and other minerals. S&P also expects earnings to grow
21.5% this year. The shares, at $57, trade at less than 10 times
2012 earnings estimates.
Gold Vs. Gold Stocks - Part III