The stock market went on a roller coaster in November and just
like an amusement park ride, it ended pretty much where it
started.
It sold off following President Obama's re-election. The
market's focus turned to the fiscal cliff that threatens to throw
the country into recession if automatic tax rate hikes and
government spending cuts take place.
Major Index Returns In Nov.
SPDR S&P 500 (
SPY
): +0.57%
PowerShares QQQ (
QQQ
), tracking the 100 largest nonfinancial stocks on the Nasdaq:
+1.31%.
SPDR Dow Jones Industrial Average (
DIA
): -0.38%.
IShares MSCI EAFE Index (
EFA
), tracking developed foreign markets: +2.79%.
IShares MSCI Emerging Markets Index (
EEM
): 1.53%.
If the S&P 500 continues on the path of previous bull
markets, it should reach 1,445 (144.50 for SPY) by year's end,
according to Birinyi Associates, an investment research firm in
Westport, Conn. The firm bases its optimistic outlook on the fact
that consumer confidence has reached a four-year high,
homebuilders' outlook has hit a six-year high and unemployment
has fallen in three-quarters of the country.
Negative fallout from higher taxes isn't a concern, as the
firm's research has found that tax rates and stock returns have
little correlation. The firm also noted that news headlines tend
to scream the most negativity at market bottoms.
Alec Young, global equity strategist at S&P Capital IQ, is
also optimistic. "Given our view that the full brunt of the U.S.
fiscal cliff will be avoided, China will maintain growth in the
7.5%-8% range, and a Lehman moment will be avoided in Europe, our
base case calls for EPS (earnings per share) growth to continue
in 2013, with midsingle digit percentage gains likely, both
domestically and abroad," Young wrote in a global equity report
Monday.
Sector Performance, Outlook
Leading S&P sectors included SPDR S&P Biotech (XBI) up
6.03%,SPDR S&P Semiconductor (XSD) 4.48%, andConsumer
Discretionary Select Sector SPDR (XLY)3.16%.
Lagging sectors wereUtilities Select Sector SPDR (XLU) down
4.33%,SPDR S&P Metals & Mining (XME) 4.63% andEnergy
Select Sector SPDR (XLE) 1.21%.
Investors should overweight their portfolios in consumer
discretionary and health care sectors while underweighting
materials and utilities, wrote Young, in a report released
Thursday. Consumer discretionary sector companies depend less on
foreign sales and will benefit from U.S. consumers feeling
wealthier as the housing market recovers.
Health care is benefiting from increasing mergers and
acquisitions, increased sales of new drug therapies, growing
emerging market sales and attractive dividends from drug
companies, Young said.
These positives will offset falling sales from patent
expirations and European spending cuts.
The Patient Protection and Affordable Care Act, also known as
ObamaCare, will likely benefit Medicaid companies, acute-care
hospitals, primary care and back-office service providers, says
Kevin Ashworth, investment director of Torrance, Calif.-based EP
Wealth Advisors, with $1.3 billion in assets under
management.
Private insurers will likely be negatively affected because
although they'll get more customers, they will incur higher
costs, taxes and eventual government competition, says Ashworth.
Medical device companies may also be hurt by lower reimbursement
rates and a new 2.3% sales tax.
SPDR Materials (XLB), up 1.88% in November and 9.58% year to
date, has underperformed S&P this year because increased
demand from emerging markets have been offset by slower demand
from the U.S., Europe and Japan.
The utilities sector is flat year to date, underperforming the
S&P by 15 percentage points. The sector is projected to see
the weakest earnings growth next year of all the S&P sectors.
It faces stricter regulations because of Superstorm Sandy, which
hasn't been priced into the overvalued shares, Young of S&P
Capital IQ noted.
Mitch Tuchman, CEO of MarketRiders.com, an online portfolio
management platform, recommendsPowerShares Dynamic Banking Sector
(PJB) andVanguard Financials ETF (VFH).
"If you subscribe to the view that economic recovery is baked
into the cake, so to speak, investing now in a broad collection
of banks would give you access to the recovery through increased
lending and improved profits at the banks," Tuchman wrote in an
email. "Few politicians in either party were interested in
restricting banks during the worst of the credit crisis, so it
follows that even fewer will be motivated to regulate or
otherwise hold down their activities as the recovery truly
begins, Obama included."
Ashworth of EP Wealth recommends avoiding the defense and
aerospace sector because "it is inevitable that defense spending
will contract over the next several years, whether we reach the
fiscal cliff sequestration or not," he wrote in an email. "With
current defense cuts already enacted as part of deficit reduction
legislation, along with possible additional sequestration or
negotiated "Grand Bargain" spending cuts, defense stocks seem to
be facing too many head winds to be considered investable."
Follow Trang Ho on Twitter
@TrangHoETFs
.