I discussed the frequent irrationality of stock valuations in my CotD post yesterday. However, so far in 2013, market players are acting a bit more rational about sector allocations, at least based on current valuations.
Here is Bespoke’s graphic showing sector returns in the Russell 3000 so far in 2013 (it’s similar in the S&P 500):
Energy and Health Care are the 2 best performing sectors. Health care continues to be my favorite sector for long-term long positions because of its attractive valuations combined with secular growth trends in its favor. Both sectors though have valuations that are below the broader market multiple (particularly on the large cap side, health care and energy are priced around 10-15x), but offer more stable cash flows with less exposure to volatile sources of demand.
On the other hand, Consumer Discretionary has consistently surprised me over the last couple years with its strength. It generally encompasses stocks with valuations significantly above the market multiple, and with demand trends that are much more volatile. Consumer Staples as also surprised me, more from a simple valuation perspective. Paying 20x earnings for a staples name seems the height of folly to me.
One last note – technology’s performance this year has been much better on the small cap level rather than among large caps, where AAPL has disproportionately influenced the entire tech sector’s performance numbers.
Markets overnight:
- A lot of headlines overnight, but quiet markets. North Korea conducted another nuclear test. Moody’s cut the outlook for global growth. But G-7 countries agreed not to target currency rates in statement (though actions speak much louder than words).
- Nikkei closed up 2%, while rest of Asia was quiet. Europe opened red, quickly rallied, up 0.4% right now.
- SPX futures -0.1%. Yesterday’s volume was lowest of the year. Could be quiet ahead of SOTU tonight.
- Dollar and Treasuries around flat, commodities slightly higher.