Q1 turned out to be one for the ages, and after some extreme moves and bouts of volatility, stocks settled down and closed out the quarter with a flourish. After falling more than -10% from the start of the year until February 11, the S&P 500 was up +6.6% in March, up +13% since February 11, and finished Q1 slightly positive at +0.8% — and it is up +206% since the depths of March 9, 2009. A combination of oil prices stabilizing, investors getting comfortable with China's economic growth and its potential impact on the global economy, and a dovish tone from the Fed after the March FOMC meeting have pushed these three all-consuming topics to the back burner. Utilities was the big winner among US sectors for Q1, up about +15%. On the other end of the spectrum, healthcare was the big loser, down -6%, but within the sector, pharmaceuticals were down -12% and biotechs were roughed up to the tune of -23%.
Besides some notable short-covering in the oil and commodities, there actually has been a discernible move back towards quality, which includes value, GARP (i.e., growth at a reasonable price), and dividend payers. I expect to see more of this as the year progresses.
In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas.
Market overview:
As for Q1 performance, while the S&P 500 was up +0.8%, other developed markets were generally down, with Japan -12.0% and Europe -7.7%. In addition, China was down -15.1% and MSCI World -0.9%, while Brazil was up +15.5% and MSCI emerging markets +5.4%. So, the U.S. is holding up relatively well compared with other developed markets, and in particular it is looking quite solid over the past several weeks. Since the February 11 bottom, the S&P 500 is up about +13%, while semiconductors are up +21%, emerging markets +18%, U.S. small caps +18%, basic materials sector +15%, and transports +15%.
China's manufacturing PMI came in at 50.2, exceeding 50 for first time since July 2015. Here at home, ISM manufacturing clocked 51.8 and consumer sentiment 91.0, while March non-farm payrolls came in at +215,000, which is the 66th consecutive month of positive job growth. However, new vehicle sales dropped sharply, which has negatively impacted stock prices of automakers like Ford (F), at least for the moment.
Manufacturing output in the United States is at an all-time high, even while the number of manufacturing jobs is shrinking due to higher productivity and automation. But it's not just the US that has lost such jobs. Globally, millions of manufacturing jobs have been shed due to the same forces. As always, change like this is frightening for people who are on the losing end. But productivity gains remain a positive force for economic development long-term, including higher quality products for lower prices.
Remarkably, Healthcare stocks — after providing market leadership for a long time — have been on the avoid-at-all-cost list since last summer, primarily due to the onset of populist election-cycle rhetoric. The biotechs and pharmaceuticals in particular have become downright radioactive in the face of politicians' assertions of price gouging and the disconcerting revelation that businesses make a lot of money off of the illnesses of others. I suppose it would be far more palatable if drug makers were all non-profits motivated purely by altruism rather than by riches, but the true capitalist would say that we likely would have far fewer and less effective treatments available to us today if that were the case.
Beginning around January 1, 2013, Healthcare in general and biotechs in particular began to greatly outperform, with the iShares NASDAQ Biotech ETF (IBB) up +179% by the time it peaked on July 13, 2015. But since that date, IBB is down -31% and iShares US Pharmaceuticals (IHE) is down -24%, while the broader iShares US Healthcare ETF (IYH) is down about -13% and S&P 500 is down only slightly at -1.7%. Meanwhile, the iShares US Utilities ETF (IDU) is up nearly +16% since last July 13. Nonetheless, some biotechs are now sporting forward P/Es in the low single digits, as investors fear that drug prices will be forced to come down, bringing earnings estimates down, as well.
