How To Make That Fourth Quarter Play
Amid interest-rate gloom and Y2K skittishness, you might be wondering if there are any smart stock strategies to pursue in what's left of the year. In an article for Standard & Poor's Personal Wealth (www.personalwealth.com) on stock market sectors, S&P senior sector strategist Sam Stovall looks at how the broad market has fared and which sectors often thrive at yearend.
So far this quarter, the Standard & Poor's 500-stock index is barely above water with a gain of 0.85%--one warning that it may be tough for the market to come anywhere near the S&P's 20.87% surge in 1998's fourth quarter. Still, you can take heart from one fact of recent history: In 12 of the past 15 years, the fourth quarter has finished a winner, with the S&P rising an average of 3.9%. That performance was topped only by the first quarter's 3.97% average gain.
Some industry groups far outperformed the broad market in the fourth quarter, however. That's especially interesting if you're looking for defensive plays to protect you from the current jitters. In a study going back to 1984 that you can find in greater detail at S&P Personal Wealth, household-products stocks led the S&P's 77 industry groups with an impressive fourth-quarter average gain of 9.55% (table). Indeed, the sector outperformed the broad market in every fourth quarter I studied.
OIL SPILL. No single reason jumps out to explain why household products should be such seasonal standouts. Who, after all, gives laundry detergent as a Christmas present? But these stocks, notably Procter & Gamble, may have benefited from fairly steady showings in the previous nine months. Going back to 1984, for example, the sector on an annual basis has outperformed the index 12 out of 15 times. This consistency--the result of steady demand, adept brand and cost management, and global expansion--may have spared the companies the tax-related sell-offs that occur when investors unload the laggards of the last three quarters at the end of the year.
Several other industries also outperformed the S&P in the fourth quarter, including food, electrical equipment, personal care, and soft drinks. All of these groups did better than the broad market in at least 11 of 15 quarters. It should be noted that the first nine months of 1999 haven't been good to food, personal care, and soda stocks, but they're back up in October.
On the flip side were some perennial underperformers. The worst five industries trailed the market at least 11 out of 15 quarters, posting average losses of 4.2% to 6.73%. The biggest losers were domestic integrated oil stocks. You'd think the start of the heating season in much of the U.S. would be good for the oils. But the fourth quarter is actually a time of transition: The big summer driving season has ended, yet the winter heating demand hasn't quite kicked in.
If you're a mutual-fund investor, how do you take advantage of this pattern--bearing in mind there's no guarantee the past will repeat itself? The choices aren't obvious because sector funds are few. But a screen run by Colette Coffman of S&P FundAdvisor (www.advisorinsight.com) found some possibilities among diversified funds. These funds have heavy representation in fourth-quarter leaders, such as consumer staples, and little or no exposure to such laggards as energy and base-material stocks. For the most part, Coffman notes, the sector weightings of such funds--Gabelli Value (GABVX), Heritage Capital Appreciation Trust (HRCPX), and Reserve Private Equity Large-Cap Growth (RLVAX)--aren't deliberate. Instead, they are by-products of the managers' stock selection style. Gabelli seeks undervalued companies, while Heritage and Reserve Private Equity are both large-cap growth funds. They've also done better than their peers over the three-year period to September, making them good plays overall--not just for the fourth quarter.