Which Stock Sector Will Lead the Next Bull Market?
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Which Stock Sector Will Lead the Next Bull Market?
Which Stock Sector Will Lead the Next Bull Market?
By MARK HULBERT
History tells us that the sector that led the last rally rarely repeats. But here's one sector that financial advisers are keen on for the next rally.
LIKE THE AGING HAS-BEEN WHO ruefully looks back on his glory days in high school, many investors frequently replay previous bull markets in their minds. And they get excited when the sector that led the previous bull market shows particular signs of life, on the assumption that it means happy days are soon to be here again.
But a careful review of past bull markets shows that this is not a helpful thing to do.
New bull markets hardly ever look and feel the same as the ones that immediately preceded them. Tellingly, it hardly ever has been the case in the U.S. that a sector or industry group is the leader of two successive bull markets.
This history therefore provides an important reality check on investors who are looking to the financial sector—the leader of the 2002-2007 bull market—to lead the market higher this time around as well. The same goes for those die-hard technology-oriented investors who are fondly remembering the Internet boom, and who are therefore hoping for a replay of the go-go years of the late 1990s.
The analysis on which I base these comments was conducted by Ned Davis Research, the institutional research firm based in Venice, Florida. The firm looked at all rallies since 1974 in which the S&P 500 index rose by at least 20% without an intervening decline of at least 20%. They came up with seven.
The firm then looked at which of ten major sectors led the S&P 500 in each of these rallies—energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecom services, and utilities.
The same sector hardly ever finishes in first place for two successive rallies, they found. In fact, there have been many instances in which a sector is at or close to the top of the relative strength readings in one rally and close to the bottom in the next.
Consider the energy sector, which was the leading sector in the late 1970s. In the bull market that began in 1982, in contrast, it was ranked in eighth place out of ten.
Just the opposite kind of reversal happened a few years later to the information-technology sector. According to Ned Davis Research, it was the worst performer of these ten major sectors in the bull market that began after the 1987 crash and lasted until July 1990. Of course, this sector turned out to be the top performer during the technology boom of the 1990s.
The financial sector over the last two bull markets did not suffer through quite as large a reversal as information technology did two decades ago, but its reversal of fortunes as still noteworthy. After having dominated the 2002-2007 bull market, the sector was merely in the middle of the pack in the rally that began in March 2009.
If investors are wrong to automatically assume that the financial or technology sectors will lead the market's next major leg up, what should they be on the lookout for? Ned Davis Research reports that they have found no formulaic way of predicting which industry or sector will be the next market leader.
But perhaps we can get an early indication by looking at the sectors that have received the greatest number of upgrades over the last three months among the top-performing advisers on the Hulbert Financial Digest's monitored list. I included in this group of top performers only those advisers who both have beaten the market over the last decade and who are among the top 25% for performance over the last 12 months.
This means that each adviser in the group has both good long-term performance and as well has short-term momentum in his favor.
The most favored category, among this group of top performers, is the one containing exchanged traded funds (ETFs) that invest in stocks of foreign countries—and especially in emerging stock markets. Examples of ETFs in this category that are highly recommended include Templeton Emerging Markets Fund (ticker: EMF) and the Mexico Equity and Income Fund (MXE).
Insofar as we bet that these top performers will be able to at least somewhat continue their winning ways, therefore, investors might want to focus their attention on this sector rather than hoping for a replay of the glory days in which the financial or technology sectors were leading the market.
By MARK HULBERT
History tells us that the sector that led the last rally rarely repeats. But here's one sector that financial advisers are keen on for the next rally.
LIKE THE AGING HAS-BEEN WHO ruefully looks back on his glory days in high school, many investors frequently replay previous bull markets in their minds. And they get excited when the sector that led the previous bull market shows particular signs of life, on the assumption that it means happy days are soon to be here again.
But a careful review of past bull markets shows that this is not a helpful thing to do.
New bull markets hardly ever look and feel the same as the ones that immediately preceded them. Tellingly, it hardly ever has been the case in the U.S. that a sector or industry group is the leader of two successive bull markets.
This history therefore provides an important reality check on investors who are looking to the financial sector—the leader of the 2002-2007 bull market—to lead the market higher this time around as well. The same goes for those die-hard technology-oriented investors who are fondly remembering the Internet boom, and who are therefore hoping for a replay of the go-go years of the late 1990s.
The analysis on which I base these comments was conducted by Ned Davis Research, the institutional research firm based in Venice, Florida. The firm looked at all rallies since 1974 in which the S&P 500 index rose by at least 20% without an intervening decline of at least 20%. They came up with seven.
The firm then looked at which of ten major sectors led the S&P 500 in each of these rallies—energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecom services, and utilities.
The same sector hardly ever finishes in first place for two successive rallies, they found. In fact, there have been many instances in which a sector is at or close to the top of the relative strength readings in one rally and close to the bottom in the next.
Consider the energy sector, which was the leading sector in the late 1970s. In the bull market that began in 1982, in contrast, it was ranked in eighth place out of ten.
Just the opposite kind of reversal happened a few years later to the information-technology sector. According to Ned Davis Research, it was the worst performer of these ten major sectors in the bull market that began after the 1987 crash and lasted until July 1990. Of course, this sector turned out to be the top performer during the technology boom of the 1990s.
The financial sector over the last two bull markets did not suffer through quite as large a reversal as information technology did two decades ago, but its reversal of fortunes as still noteworthy. After having dominated the 2002-2007 bull market, the sector was merely in the middle of the pack in the rally that began in March 2009.
If investors are wrong to automatically assume that the financial or technology sectors will lead the market's next major leg up, what should they be on the lookout for? Ned Davis Research reports that they have found no formulaic way of predicting which industry or sector will be the next market leader.
But perhaps we can get an early indication by looking at the sectors that have received the greatest number of upgrades over the last three months among the top-performing advisers on the Hulbert Financial Digest's monitored list. I included in this group of top performers only those advisers who both have beaten the market over the last decade and who are among the top 25% for performance over the last 12 months.
This means that each adviser in the group has both good long-term performance and as well has short-term momentum in his favor.
The most favored category, among this group of top performers, is the one containing exchanged traded funds (ETFs) that invest in stocks of foreign countries—and especially in emerging stock markets. Examples of ETFs in this category that are highly recommended include Templeton Emerging Markets Fund (ticker: EMF) and the Mexico Equity and Income Fund (MXE).
Insofar as we bet that these top performers will be able to at least somewhat continue their winning ways, therefore, investors might want to focus their attention on this sector rather than hoping for a replay of the glory days in which the financial or technology sectors were leading the market.
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