By Sam Stovall I was going through my periodic scan of relative performance charts for the industries in the S&P Super 1500 Index and basically saw two types of formations: Windward and Leeward (sharp angles of ascent and descent, respectively).
The rising chart formations belonged to last-year's out performers - industries in the Consumer Staples, Energy, Health Care, Transportation, and Utilities industries - which, despite the January setbacks, continued to benefit from their defensive qualities and offer investors a safe haven in the midst of weakening corporate earnings. The descending chart formations belonged to the usual suspects - Tech and Telecom - even though they, like daffodils that get fooled into awakening during a January thaw, attracted attention to themselves by exploding as a result of the two 50-basis point reductions by the Federal Reserve. Either way, I felt I was too early to discuss top-outs or turn-arounds.
Then it dawned on me -- it's Valentine's Day! How about a gift-related industry? Not only is there a Consumer (Jewelry, Novelties & Gifts) industry index, but it also has a chart formation that, like many of the industries in the consumer cyclicals sector, is showing signs of recovery due to the easing policy recently adopted by the Fed. The only thing working against me is that our analyst covering these issues is concerned about the near-term fundamentals. Oh well, two out of three ain't bad.
So first the bad news: the current fundamentals. S&P sees signs of continued economic growth with a soft landing. It expects consumer spending to grow only modestly throughout 2001, with the second half only slightly stronger than the first six months. In our view, despite an expected period of falling rates, the volatile stock market, along with the effect of higher interest rates in 2000 and consumers' current debt levels, will probably have a negative impact on consumer spending, especially for certain discretionary purchases.
And recent low consumer confidence levels are likely to exacerbate this negative situation. Indeed, as jewelry, novelties, and gift products are among the most discretionary of discretionary items, we would expect them to be among those product categories that shoppers sharply cut back upon. On the other hand, they do have a saving grace in that most products in this category are low-ticket items.
But for aggressive traders looking to catch an industry on a rebound from an oversold condition, this may be one to consider from a technical standpoint. As a result of the higher interest rates in 1999-2000, this industry index plummeted 30% in 2000, versus an 8% fall for the broader market. Through early February, however, this group jumped 12% on the lower rates. What's more, these issues could continue to benefit near term from an additional 50-100 basis points decrease in short-term rates, as well as the $1.6 trillion tax break proposed by the new Republican Administration.
There are 12 companies in this industry within the S&P Super 1500. Only American Greetings (AM) is followed analytically, and it carries a one-STAR (Sell) ranking. Visit www.spglobal.com to see the other industry components in the S&P 500, MidCap 400 and SmallCap 600 Indexes. Stovall is senior sector strategist for Standard & Poor's