|
| ||
 Investment Professionals Access Account Open Account Fund PerformanceRetirement |
||
| Webcasts Press Center Forms and Prospectus About the AdvisorFrank Talk |
||
|
Sharp Sector Rotation Ahead Michael L. Ingraham, Ph.D. Research Director |
The third quarter 2000 continued trends set in the second quarter, but
with more emphasis and determination. Only utilities, financials,
capital goods, energy and transportation posted positive returns. This
is an odd mix of sectors, but possible themes that cement them
together include a slowing economy, low inflation and uncertainty
about the direction of interest rates.
Few investors believed that the high-flying technology sector would weaken further, and even fewer believed that communications services would falter again, yet we see further weakness in these two sectors. Interestingly, the industry winners over the last three months are a tribute to the “old” rather than the “new” economy. The one sector that is clearly performing in line with perceptions is consumer cyclicals, a sector that represents a broad mish-mash of retailing, autos and others. The mix of utilities with energy certainly makes sense; however, as oil and gas prices rise, why have transportation and capital goods joined the best performers? We believe the markets are going through a sharp sector rotation, and confusion may prevail. Last quarter, we asked “Who is in control?” and concluded that the Federal Reserve was omnipresent in its vigilance on the inflation front, causing some investors to be concerned about potentially higher interest rates. We now believe attention has turned to the business cycle, and sector rotations suggest a new direction for the market. We believe the juggernaut economy may continue. Gross domestic product (GDP) for the second quarter was 5.6 percent. S&P 500 corporate earnings for the second quarter exceeded expectations, and third-quarter expectations of 19 percent were met. In brief, the capital markets remain strong and able to withstand a moderate slowdown. Market Valuation: Price/Earnings and Earnings Projections The drivers of earnings are expected to come from energy and technology, with some support from transportation, health care and capital goods. Disappointments continue in communications services, consumer cyclicals and basic materials. Price Performance In the third quarter, major market indexes were weak but with some bifurcated performances. Segments of the S&P 500, for example, showed diametrically opposed gains and losses: the BARRA Value Index climbed 8.3 percent while BARRA Growth declined 8.9 percent. Overall, the S&P 500 was down 1.2 percent, continuing a downward trend from the second quarter. The BARRA 500 Value Index is a capitalization-weighted index of all stocks in the S&P 500 that have low price-to-book ratios while the BARRA 500 Growth Index is a capitalization-weighted index of all stocks in the S&P 500 that have high price-to-book ratios. By contrast, the Nasdaq Composite was down a sharp 7.3 percent, which further accented negativity in the growth-dominated Nasdaq Composite Index. Finally, the Dow Jones Industrial Average gained 1.9 percent, which surprised many. Mutual Fund Activity Year to date, we have seen more money flowing into actively- vs. passively-managed funds. In addition, more money flowed into mutual funds in the third quarter of 2000 than in the same quarter of 1999, although less money has flowed in on a sequential quarterly basis. There are also indications that cash levels at mutual fund firms are on the increase, suggesting caution. |
