A Ray of Hope?

Capitulation quarters (like the one we just had) typically lead to rebounds in the market -- if the economy cooperates

By Sam Stovall

This past quarter was certainly a bad one for the S&P 500. Its 12.1% decline was one for the history books, but not the worst since 1959.

Just how bad was it? It was so bad that while eight of the 11 sectors in the S&P 500 outperformed the broad benchmark, only one posted a positive return. Consumer Cyclicals eked out a 0.6% advance, while Transportation and Communication Services, the other top-three performers, each fell less than 1.5%. Capital Goods, Health Care and Technology were the three worst performing sectors, underperforming the overall market and dropping 14% to 25%.

On an industry level, Communications Equipment, Computers (Networking), Computers (Peripherals), Electronics (Instrumentation) and Investment Banking & Brokerage were the worst performers, falling from 26% to nearly 60%.

Amidst all of this investment carnage, one could easily ask, "Is there any positive spin that could be put on this quarter's performance?"

Yes. There are more than 100 industries in the S&P 500. Nearly one-third -- 33 to be exact -- posted positive returns for the quarter with an average advance of 8.6%. In fact the top five industries - Banks (Money Center), Engineering & Construction, Housewares, Railroads and Telecom (Long Distance) - each gained from 15% to more than 30%. More important, however, is how the market has performed in the six months following "Capitulation Quarters," as I like to call them.

Below is a table of the 10 worst quarterly performances for the S&P 500 since the fourth quarter of 1959. The Mar. 2001 quarter's decline of 12.1% places it sixth on the list. What is interesting is that the five worst quarters each posted positive returns in the subsequent six months by an average of 21%. Among the 10 worst performing quarters, however, the average rebound six months after slips to a shade below 16% and we encounter two periods of further decline for the market.

Both the Sept. 1981 and Dec. 1973 quarters preceded deep economic recessions that each lasted 16 months. What's more, while the "500" was in the black 12 months after its substantial decline in the Sept. 1981 period, after the Dec. 1973 quarter, the index posted a total decline of nearly 30% 12 months later.

So, what should an investor take away from this study? While it is comforting to know that "Capitulation Quarters" typically lead to rebounds in the market, all bets are off if the U.S. heads into a steep economic decline.

  % Change  
  Qtr. Next 6 Mos.
9/1/74 -26.1 31.2
12/1/87 -23.2 10.7
6/1/62 -21.3 15.3
6/1/70 -18.9 26.7
9/1/90 -14.5 22.6
9/1/75 -11.9 22.5
9/1/81 -11.5 -3.6
9/1/98 -10.3 26.5
12/1/73 -10 -11.8
9/1/66 -9.7 17.8
Average -15.7 15.8

Stovall is Senior Sector Strategist for Standard & Poor's

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