The last time they beat cyclicals by this much was in October 1998, a month after the collapse of hedge fund Long-Term Capital Management LP and its bailout by a group of Wall Street firms and the Federal Reserve. The S&P 500 lost 19 percent between July 17 and Oct. 8 in 1998. The Morgan Stanley Consumer Index exceeded the Cyclical Index by 8.2 percentage points that month. The S&P 500 gained 30 percent over the next 90 days, the data show.
‘Human Nature’
“This is human nature,” James Paulsen, who oversees $325 billion as the Minneapolis-based chief investment strategist at Wells Capital Management, said in a May 1 phone interview. “If you’re a risk-averse investor already, you come into the market slowly. It’s only once you’ve been in for a while and the market’s been treating you well that you get more aggressive.”
Defensive industries are rallying as the market enters a period that has seen its biggest declines over the last three years. The S&P 500 has posted an average loss of 15 percent starting in April since 2010, data compiled by Bloomberg show. No such retreat has occurred this year. The benchmark gauge for American equities is up 13 percent, rising every month since October, and closed at records four times last week.
At the same time, earnings growth is slowing. Profits in the S&P 500 are forecast to rise 2 percent in the quarter ending March 30. That compares with 4.7 percent on average last year and 25 percent in 2010 and 2011, Bloomberg data show.
About two companies have predicted earnings will be below analyst estimates for each that says they will be above forecasts since April 8, according to data compiled by Bloomberg. The ratio is twice as high as in the last three years.
Vulnerable Market
The S&P 500’s advance makes it more vulnerable to disappointing economic growth and Europe’s recession, according to Thomas Garcia of Thornburg Investment Management Inc., which manages $80 billion. At 15.8 times annual earnings, the index’s valuation is higher than any time since 2011, data compiled by Bloomberg show.
The U.S. and Chinese economies grew less than forecast last quarter. The European Central Bank cut its key interest rate to a record low last week, as manufacturing output contracted in April for a 21st straight month, according to figures from London-based Markit Economics.
“I don’t think Europe’s out of the woods yet, and you’re starting to see a slowdown in China, which is definitely worrying some people,” Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg, said by telephone May 2. “I’m still worried going forward. There are definitely things to be bearish about.”