Stocks: Best and Worst Sectors for '08

S&P reviews the performance of key groups as the current year draws to a closeand names the sectors its analysts like for 2008

The S&P 500 gained 1.4% in January, 2007, signaling an up year for the markets, according to the January Barometer. (Since 1945 whenever the S&P 500 advanced in January, the S&P 500 continued to rise during the remaining 11 months of the year 85% of the time, posting an average price advance of 11.8%.)

Year-to-date through Dec. 13, the S&P 500 gained nearly 4.6%, or about half what it has climbed on average each year since World War II. So the January Barometer was correct on direction, but off the mark on magnitude. Other markets did a little better, however, as the S&P MidCap 400 gained 8% and the S&P Global 1200 rose nearly 9%. Of course, readers should recall that what occurred in the past may not always repeat itself in the future.

Within the S&P 500, 8 of the 10 sectors advanced, led by 20%-plus increases for the Energy and Materials sectors, vs. double-digit declines for the Consumer Discretionary and Financials sectors. About 56% of the industries in the S&P 500 rose on the year (72 of 129), with Education Services, Engineering & Construction, and Fertilizer companies each gaining more than 95%. The worst performers were Department Stores, Homebuilding, Motorcycle Manufacturers, Real Estate Management & Development, and Thrifts & Mortgage Finance companies, which were each down 30% or more on the year.

Rate Cuts for Psychological Stability

Factors whipsawing the equity markets can be remembered by the initials CFO, for Credit, the Fed, and Oil. The S&P 500 suffered its first one-day decline of more than 2% in more than three-and-a-half years in late February on a sell-off in China and emerging worries over sub-prime mortgages and their effect on credit availability and future earning growth. We have experienced 10 more such one-day declines, as well as a summer swoon of 9.5% and a November nosedive of 10%.

Adding to these woes were oil prices that approached $100 per barrel and gold, which soared to nearly $850 per ounce. The Fed stepped in to add some monetary and psychological stability by cutting rates three times (we think they'll cut again in January).

The only thing left is for the "500" to reach our yearend 2007 target of 1560, thus posting a 10% price appreciation from the 1418 closing value in 2006, and placing us well on the way to our year-end 2008 target of 1650, and recording a gain of 6% for the coming year.

S&P's equity analysts, based on the aggregate STARS rankings for component companies, believe the S&P 1500 subindustries listed in the tables below will likely be next year's winners and losers:

Subindustries with Highest STARS
Subindustry % Chg. (YTD thru Dec. 13) S&P STARS
Tobacco 18.0 4.9
Systems Software 17.2 4.8
Household Products 15.2 4.8
Restaurants 6.9 4.5
Life Sciences Tools & Services 31.7 4.4
IT Consulting & Other Services (16.3) 4.3
Apparel, Accessories & Luxury Goods (18.7) 4.3
Integrated Telecom. Svcs. 15.3 4.2
Drug Retail 3.5 4.2
Life & Health Insurance 10.0 4.2
Computer & Electronics Retail 13.6 4.2
Trading Companies & Distributors 12.0 4.2
Air Freight & Logistics (0.5) 4.2
Computer Hardware 32.2 4.2
Subindustries with Lowest STARS
Subindustry % Chg. (YTD thru Dec. 13) S&P STARS
Diversified Banks (18.8) 2.9
Specialized REITs (14.3) 2.9
Specialized Consumer Svcs. (8.2) 2.9
Packaged Foods & Meats 3.6 2.9
Forest Products 0.5 2.8
Investment Banking & Brokerage (18.7) 2.8
Thrifts & Mortgage Finance (51.6) 2.7
Industrial Gases 47.1 2.7
Residential REITs (27.2) 2.6
Broadcasting & Cable TV (24.2) 2.6
Automobile Manufacturers (11.4) 2.5
Internet Retail 65.6 2.4
Home Entertainment Software 17.8 2.4
Motorcycle Manufacturers (35.2) 2.0

Source: Standard & Poor's Equity Research

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of subindustries in the S&P 1500), along with a stock with the highest S&P STARS (tie goes to the highest market value).

Subindustry Company (Ticker) S&P STARS Rank Price (12/13/07)
Coal & Consumable Fuels Peabody Energy (BTU) 4 $59
Commodity Chemicals Lyondell Chemical (LYO) 3 $48
Computer Hardware Apple Inc. (AAPL) 4 $194
Construction & Engineering Fluor Corp. (FLR) 4 $158
Construction & Farm Machinery Manitowoc (MTW) 5 $49
Diversified Metals & Mining Freeport-McMoRan Copper (FCX) 3 $108
Education Services Career Education (CECO) 5 $28
Fertilizers & Agr. Chem. Monsanto (MON) 3 $106
Health Care Services Laboratory Corp. (LH) 5 $73
Industrial Gases Air Products (APD) 3 $102
Internet Retail (AMZN) 2 $94
Oil & Gas Equip. & Svcs. Baker Hughes (BHI) 5 $83
Oil & Gas E&P Swift Energy (SFY) 5 $42
Tires & Rubber Goodyear Tire (GT) 3 $28

Source: Standard & Poor's Equity Research

Before it's here, it's on the Bloomberg Terminal.