S&P Volatility Double Average as Index Moves Least Since ‘70
Stock swings that reached twice the five-decade average left the Standard & Poor’s 500 Index (SPX) with the smallest price change in 41 years and utilities, soapmakers and health-care providers at the highest valuations since 2008.
The S&P 500 rose 3.7 percent last week, sending the measure to a gain of 0.6 percent for the year. The last time it moved less on an annual basis was in 1970, when it fell 0.1 percent. Within the gauge, companies least tied to economic growth, such as Biogen Idec Inc. (BIIB) and Hershey Co. (HSY), increased an average 15.7 percent including dividends, returning 8.2 times more than the index after adjusting for historical price swings. That’s the biggest gap since at least 1989.
Bears say that the 2011 performance means there are even fewer stocks worth buying after valuations for defensive shares increased 7.4 percent. With the U.S. showing more signs of growth, bulls say the divergence between those shares and companies most dependent on the economy preceded market-wide rallies in 2001, 2007 and 2009.
“The combination of a very crowded trade and a market that’s very cheap with a lot of doubters suggests to me the place to put funds is in the market overall,” Andrew Slimmon, the Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney LLC, which has $1.7 trillion in client assets, said in a phone interview Dec. 19.
While the S&P 500 barely moved on a year-to-date basis, 2011 was one of the most volatile years on record. Eighty-five companies fell 20 percent or more, compared with 11 in 2010 and 15 in 2009. First Solar Inc. (FSLR) of Tempe, Arizona, posted the biggest declines in the gauge, falling 73 percent, and Alpha Natural Resources Inc. (ANR) in Bristol, Virginia, tumbled 65 percent.
The Dow Jones Industrial Average (INDU) alternated between gains and losses of more than 400 points on four days for the first time ever in August. Daily share swings in the S&P 500 averaged 2.2 percent that month, the most for any August since 1932, Bloomberg data show. The index moved 1.3 percent a day since April, compared with 50-year average of 0.6 percent before the collapse of Lehman Brothers Holdings Inc. in 2008.
After rising 8.4 percent to start 2011 and reaching an almost three-year high of 1,363.61 on April 29, the S&P 500 fell as much as 19 percent to 1,099.23 on Oct. 3 as Congress and the administration of President Barack Obama struggled over deficit cuts and Europe was forced to bail out Greece.
The measure has trimmed its decline since April to 7.2 percent as U.S. manufacturing and retail sales rebounded and the unemployment rate fell to 8.6 percent in November from 9.2 percent in June. The S&P 500 erased its loss for 2011 last week. The index rose less than 0.1 percent to 1,265.43 at 4 p.m. New York time today.
Utilities and household product makers are the only industries with gains since the S&P 500’s April peak, rising 8.5 percent and 3.9 percent, respectively. Banks have declined 19 percent since then, commodity companies slid 16 percent and energy producers are down 12 percent.
The Stoxx Europe 600 Index has declined 12 percent in 2011, while the MSCI Emerging Markets Index lost 20 percent and the MSCI World Index of shares in developed nations dropped 7.6 percent. Government bonds worldwide have returned 5.4 percent this year as of Dec. 22, according to Bank of America Merrill Lynch index data. That compares with 3.8 percent last year and is the biggest gain since 2008.
Job losses in the global banking and financial-services industry this year have topped 200,000, according to Bloomberg data, as trading slumped and investment losses grew. Revenue from investment banking and trading at the 10 largest global firms fell 12 percent in the first nine months of this year, after a 23 percent decline in 2010, according to industry consultant Coalition Ltd.
“I was in such a good mood when the year started and everything just went sour,” Keith Wirtz, who oversees $14.6 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a Dec. 22 phone interview. “We were dealing with factors that felt unique.”
As equities tumbled and price swings increased, investors bought companies whose earnings rely the least on economic growth. Utilities returned 19 percent in 2011 with dividends, led by Oneok Inc. (OKE) Household goods makers increased 14 percent, pacing by gains in Kraft Foods Inc. (KFT) and health-care stocks rose 13 percent as Pfizer Inc. jumped.
Investors received even more from utility, staples and health-care stocks than the S&P 500 this year after adjusting for price volatility. The average return including dividends from the three defensive groups was 8.2 times the S&P 500’s return after taking into account past price fluctuations, according to data compiled by Bloomberg. That’s the biggest outperformance in risk-adjusted returns in more than two decades, the data show.
So-called cyclical stocks, or companies most tied to economic growth, posted the biggest losses in 2011. Banks fell 16 percent including dividends, led by (S5FINL) Bank of America Corp. and Genworth Financial Inc. (GNW), while commodity companies, including U.S. Steel Corp. (X) and Alcoa Inc. (AA), dropped 8.7 percent as a group.
Now, defensive shares trade at an average price of 14 times reported profits, according to Bloomberg data. The average valuation in 2011 was 13.6, the highest since 2008. That compares with ratios of 13.3 for the S&P 500, 11 for banks and 12 for mining and chemical companies. Non-cyclical companies have traded 5.9 percent below the index’s valuation on average since 1999, data compiled by Bloomberg show.
“Many of those defensive-type of businesses have become crowded and expensive,” Chris Sheldon, who helps oversee $400 billion as chief investment officer for Dreyfus in New York, said in a telephone interview on Dec. 21. “We expect a twist in the flavor to occur at some point next year. Europe’s debt crisis has slowed growth worldwide, but not interrupted it.”
While profits at defensive companies are likely to fare better next year if global growth decelerates, valuations for the groups have gotten too expensive, leaving few attractive names in equities, according to Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati.
“It’s tough to get terribly excited about any group,” Sorrentino, who helps oversee $14.5 billion in assets, said in a telephone interview on Dec. 23. “We’re not pounding the table that defensives are a compelling area right now. We’ve seen some significant sell-offs in the more cyclical areas,” he said. “It’s tough to ferret out something that can deliver some positive alpha to a portfolio.”
High valuations for foodmakers, drug companies and utilities proved to be buying opportunities for the S&P 500 and companies most tied to the economy during the past decade. Price-earnings ratios (S5CONS) for staples, health-care and utility stocks rose as much as 13 percent above the S&P 500 in 2001, before the full index rallied 13 percent starting in September. Cyclical groups, including commodity producers and retailers, increased 19 percent in the same period.
The spread reached 16 percent in March 2007 before the index jumped 13 percent to a record and cyclical stocks climbed an average 16 percent. In November 2008, defensive stocks were 7.1 percent more expensive than the rest of the market. That was four months before global stocks bottomed and the S&P 500 doubled, sending shares of cyclical companies up 135 percent.
Profits among defensive stocks are forecast to increase 3.8 percent in 2012, according to more than 7,000 analyst estimates compiled by Bloomberg. Earnings are poised to climb 18 percent for banks and 11 percent for mining and chemical companies.
Economists predict the U.S. economy will gain momentum in 2012 after slowing to a 1.8 percent annual rate this year from 3 percent last year, as the unemployment rate fell to the lowest level in more than two years. Gross domestic product will expand 2.1 percent in 2012, according to the median estimate of economists surveyed by Bloomberg.
Investors sought havens in companies such as Biogen, the world’s largest producer of multiple sclerosis medicines. The Weston, Massachusetts-based drugmaker’s return adjusted for risk was 17 times the S&P 500’s in 2011, as success with experimental drugs shielded its shares. Biogen surged 65 percent this year, the fifth-biggest gain in the benchmark equity index.
Hershey’s return taking price swings into account was 15 times the S&P 500’s, as cocoa prices posted the longest string of losses in five decades earlier this month. The risk-adjusted return for Richmond, Virginia-based Altria Group Inc. (MO), the largest tobacco seller in the U.S., was 15 times the S&P 500’s.
Valentijn van Nieuwenhuijzen, who helps oversee $163 billion as head of tactical asset allocation at ING Investment Management in The Hague, has reduced investments in utilities and holds more shares in energy and technology companies than are represented in indexes. He is keeping a “neutral” balance between both groups, he said.
“The relative valuation between sectors has moved more extreme,” van Nieuwenhuijzen said in a Dec. 20 telephone interview. “We see big support from valuation both on equities themselves and for cyclical sectors.”