American companies with earnings least tied to the economy are beating so-called cyclical shares by the widest margin since the failure of Long-Term Capital Management, a sign that almost always means a bull market will accelerate.
Defensive shares such as Johnson & Johnson and Procter & Gamble Co. have rallied 19 percent on average in 2013, the best start since 1991, and exceeded cyclical stocks by more than 8 percentage points last month, the most since October 1998, according to data compiled by Bloomberg. As long as the economy isn’t shrinking, a gap of that size has presaged rallies of 10 percent in the Standard & Poor’s 500 Index since 1973, data compiled by JPMorgan Chase & Co. show.
Bulls say investor preference for stocks that do better in sluggish economies is a contrarian indicator that’s already giving way to bigger gains among technology and energy shares. Bears say the trend shows investors are losing confidence at the same time as chief executive officers, who have lowered earnings forecasts at the fastest rate for any first quarter since 2001, data compiled by Bloomberg show.
“Contrarian theories often work because if everyone is committed to one side, then there’s not much more firepower left,” Donald Selkin, a 37-year Wall Street veteran who helps manage about $3 billion of assets as the chief market strategist at National Securities Corp. in New York, said in a May 3 phone interview. “We could see a change in leadership in the market if the perception becomes that the economy is strengthening.”
Cyclical Revival
The S&P 500 advanced 2 percent last week to 1,614.42, as home sales rose, jobless claims unexpectedly fell and profit at companies from Avon Products Inc. to Seagate Technology Plc beat analyst estimates. Technology shares and energy stocks led the gains for a second week after trailing the market for the previous five, data compiled by Bloomberg show. Futures on the S&P 500 rose less than 0.1 percent at 8:18 a.m. in London today.
Individuals and funds have poured money into drugmakers and household-product suppliers, speculating they provide safety because their products are in demand whether the economy shrinks or expands. The buying is mirrored in investment in exchange- traded funds that track stock indexes.
Outstanding shares rose by 17 percent this year in the biggest ETFs for health-care and consumer staples companies, whose largest holdings are New Brunswick, New Jersey-based J&J and Procter & Gamble in Cincinnati, according to data compiled by Bloomberg. Investors liquidated holdings in the largest energy ETF and the Powershares QQQ Trust, which own ExxonMobil Corp. in Irvine, Texas, and Cupertino, California-based Apple Inc., the data show.
Bullish Signal
Outperformance by defensive industries has been a bullish sign for the S&P 500 in past bull markets, with the index gaining eight of 10 times over the next quarter, according to data compiled by JPMorgan. When defensives led by a margin approaching last month’s, in July 2009, the S&P 500 gained 22 percent.