As global stocks return to a bull market, the losers in the U.S. are companies least tied to economic growth.
For the first time since 1999, Standard & Poor’s 500 Index utilities, phone companies and providers of consumer staples posted the only monthly losses, slumping at least 1.5 percent with dividends in January, and continued to lag behind this month. It’s a reversal from 2011, when the three defensive industries returned more than 6.3 percent as investors embraced stocks thought to do well during a slowdown.
Investors are shifting toward riskier assets as U.S. manufacturing expanded the most since June and the jobless rate fell to a three-year low of 8.3 percent. The MSCI All-Country World Index has risen 20 percent from its October low, meeting the definition of a bull market, while the dollar has weakened against 15 of its 16 major counterparts. In 2011, the global equity measure suffered its biggest losses since the subprime-mortgage crisis.
“Last year, investors tended to hide in things which are stable, paying reasonable dividends,” said Sudhir Nanda, a money manager and head of the quantitative equity group at T. Rowe Price Group Inc. in Baltimore, which oversees $489.5 billion. “This year, people looked at the U.S. and said, ‘Things are not really that bad.’ If the economy is humming, people tend to buy more of the sectors which will profit from growth, industrials, materials and things like that.”
The S&P 500 rose 0.2 percent to 1,351.95 today as Greek political leaders struck a deal on a package of austerity measures needed to secure international rescue funds.
Consolidated Edison Inc., Verizon Communications Inc. and Philip Morris International Inc. have all fallen in 2012 after rallying more than 12 percent last year. The S&P 500 has gained 7.3 percent this year, including 2.9 percent in February, for its best start since 1991. Indexes of financial, materials, technology, industrial and consumer-discretionary stocks have each outperformed the broader gauge.
S&P 500 phone companies posted the biggest decline in January, falling 3.9 percent. Utilities dropped 3.7 percent, the most since May 2010, after leading U.S. equities for the first time in 11 years in 2011. Consumer-staples stocks, which gained at least 10 percent in five of the previous six years, declined 1.7 percent. Procter & Gamble Co., the world’s largest household-products maker, slipped 5.5 percent for the biggest monthly drop in three years.
Investors flocked to defensive industries in 2011 as the U.S. unemployment rate held at or above 9 percent until October and the European debt crisis led economists to cut forecasts for American and global growth.
Dividends became a bigger attraction for investors than low valuations given the perceived need for protection against losses and with bonds paying record-low yields, Tim Paulin, vice president of product management and investment research at Touchstone Securities Inc. in Cincinnati, said in a telephone interview.
S&P 500 telecommunications, utilities and consumer-staples stocks pay dividend yields of 5.74 percent, 4.18 percent and 2.93 percent, respectively. None of the other seven groups in the S&P 500 yield more than 2.17 percent.
The S&P 500 Telecommunications Services Index’s price-earnings ratio climbed 43 percent higher than the entire market’s valuation in October, the most since 2001. The MSCI World Utilities Sector Index began 2012 with a valuation 87 percent higher than the broader index. Between 1995 and September 2011, the group’s price-earnings ratio was 23 percent below the MSCI World Index’s on average.
Looking for Yield
“People were gravitating to dividend yields,” said Paulin, whose firm, a unit of Western & Southern Financial Group Inc., oversees $8.4 billion. “If things don’t work out from price appreciation in the short term, at least I get a 3, 4, 5 percent dividend yield. People bid up prices for dividend stocks.”
The jump in so-called cyclical stocks won’t continue all year, said John Wilson, a money manager at Sprott Inc., which oversaw about C$9.1 billion ($9.1 billion) as of Jan. 9. He’s planning to buy U.S. health-care companies because they sell products people have trouble giving up and aren’t as expensive versus earnings as utilities and the consumer-staples group.
“The economy will be more difficult than people expect,” he said during an interview in Toronto. “Europe will weigh more on the economy than people think. That’s going to mean that companies that have visibility in their earnings and recurring revenue streams are likely to do better than those that are more cyclically oriented.”
The shift to riskier industries began as economic data improved. U.S. housing starts advanced to a 19-month high in November. The unemployment rate fell 0.2 percentage point for three straight months through January, the first time since 1984 that it dropped that much for so long. Bloomberg’s Consumer Comfort Index, based on a survey of U.S. consumers, increased the most in five years in the fourth quarter after retreating to near a record low.
“There’s been a glimmer of hope,” David J. Winters, the manager of the $1.43 billion Wintergreen Fund, said in a telephone interview from Mountain Lakes, New Jersey. The fund has beaten 99 percent of other funds in its category in the last five years, according to data compiled by Bloomberg. “People looked at unemployment improving and are afraid of being left out of the rush.”
Financials, Consumer Stocks
Myles Zyblock, the chief institutional strategist at Royal Bank of Canada in Toronto, raised his rating on U.S. financial stocks to “overweight” from “market weight” and cut his view on consumer staples to “market weight,” citing economic growth in a note yesterday to clients.
Dow Jones Industrial Average companies that posted the nine biggest gains this year declined in 2011, including cyclical companies such as Bank of America Corp., Caterpillar Inc. and Alcoa Inc.
“Investors are rotating back to stocks that are going to benefit from economic growth,” Eric Mintz, who helps oversee about $7 billion at Eagle Asset Management in St. Petersburg, Florida, said in a telephone interview. His firm favors software makers. “It’s important to have leadership from this group in a bull market.”