While value trounced growth in '06, S&P says almost everything went right for market investors. Which sectors will lead the way this year?

From Standard & Poor's Equity ResearchThere aren't many years where one can say that almost everything went right, but stock market investors may wish to point to 2006 as one example. Take a look at the performances of equity benchmark, sector, and industry groups. International benchmarks gained from 6% in Japan to 45% in Brazil.

Domestically, as seen in the accompanying tables, small caps beat large caps for the seventh year in a row, with the S&P Small Cap 600 advancing 15.1% to the S&P 500's 14.1% gain.

Value trounced growth as the S&P 500 Pure Value index rose 17.6% vs. the S&P 500 Pure Growth index's rise of 7.2%. On the sector side, Telecom Services jumped 31.7%, reversing its 9.0% decline in 2005, while Energy repeated as a double-digit gainer, climbing more than 23%. And while Health Care and Information Technology were the laggards in 2006, each posted advances, by registering increases of 6.1% and 7.9%, respectively.

Benchmarks & S&P 500 Sectors

Name

% Chg. (YTD thru 12/29/06)

Telecommunication Services

31.7

Energy

23.4

Consumer Discretionary

17.7

S&P 500/Citigroup Pure Value

17.6

Utilities

17.1

Financials

16.9

Materials

16.4

S&P SmallCap 600

15.1

S&P 500

14.1

Consumer Staples

12.3

Industrials

11.6

Nasdaq

10.0

Information Technology

7.9

S&P 500/Citigroup Pure Growth

7.2

Health Care

6.1

S&P 500 Best-Performing Industries

Industry

% Chg. (YTD thru 12/29/06)

Steel

77.7

Diversified Metals & Mining

45.3

Broadcasting & Cable TV

43.7

Integrated Telecom. Svcs.

43.4

Investment Banking & Brokerage

40.2

Motorcycle Manufacturers

36.9

Fertilizers & Agricultural Chemicals

36.9

Construction Materials

33.7

Department Stores

33.5

Metal & Glass Containers

33.4

S&P 500 Worst-Performing Industries

Industry

% Chg. (YTD thru 12/29/06)

Education Svcs.

(36.1)

Homebuilding

(20.9)

Internet Software & Svcs.

(20.4)

Gold

(14.9)

Electronic Manufacturing Svcs.

(13.6)

Internet Retail

(10.8)

Semiconductors

(9.4)

Managed Health Care

(6.6)

Airlines

(5.6)

Specialized Consumer Svcs.

(5.6)

Like too many passengers on one side of a ship, there was a definite tilt to the positive side in 2006, as fewer than 10% of the nearly 130 subindustry indexes in the S&P 500 posted declines in the year just ended. By comparison, 35% of all industries posted price declines in 2005, while 65% of them fell in 2002. This year's leaders were Steel, Diversified Metals, Broadcasting, Telecom, and Investment Banking, each recording increases in excess of 40%, while Education Services, Homebuilding, Internet, and Gold came away with tarnished reputations as each index fell 15% or more.

Which subindustries do S&P analysts think will be the leaders in 2007? I selected one subindustry index from each of the 10 sectors in the S&P 500 that has both a positive fundamental outlook and a relatively high aggregate S&P STARS ranking. These are shown below, along with an index member with a favorable STARS ranking.

Industry

Company

S&P STARS Rank

Price (12/29/06)

Air Freight & Logistics

FedEx (FDX)

5

$108

Apparel, Accessories & Luxury Goods

Coach (COH)

5

$44

Computer Storage & Peripherals

Western Digital (WDC)

5

$21

Managed Health Care

UnitedHealth Group (UNH)

5

$54

Metal & Glass Containers

Ball Corp. (BLL)

4

$44

Oil & Gas Refining & Marketing

Valero Energy (VLO)

5

$52

Other Diversified Financial Svcs.

Bank of America (BAC)

5

$54

Soft Drinks

Coca-Cola (KO)

5

$49

Water Utilities

Aqua America (WTR)

4

$23

Wireless Telecom. Svcs.

Sprint Nextel (S)

4

$19

So there you have it. 2006 has come and gone, and the outlook for 2007 is fairly upbeat. Last, but not least, I hope that your 2007 exceeds analysts' expectations.

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Industry

Company

S&P STARS Rank

Price (12/28/06)

Agricultural Products

Archer-Daniels-Midland (ADM)

4

$32

Apparel, Accessories & Luxury Goods

Coach (COH)

5

$44

Broadcasting & Cable TV

Comcast (CMCSA)

4

$43

Department Stores

Federated Dept. Stores (FD)

4

$38

Diversified Metals & Mining

Freeport-McMoRan (FCX)

4

$56

Fertilizers & Agricultural Chemicals

Monsanto (MON)

2

$53

Integrated Oil & Gas

Exxon Mobil (XOM)

5

$77

Integrated Telecom. Svcs.

CenturyTel (CTL)

4

$44

Investment Banking & Brokerage

Merrill Lynch (MER)

5

$94

Metal & Glass Containers

Ball Corp. (BLL)

4

$44

Motorcycle Manufacturers

Harley-Davidson (HOG)

3

$71

Movies & Entertainment

Disney (DIS)

5

$35

Steel

Carpenter Technology (CRS)

4

$103