S&P says the month typically delivers above-average returns for equities. Rate cuts and lower oil prices could be this year's catalysts
From Standard & Poor's Equity ResearchFor investors, this was not a November to remember. Since 1945, the 11th month of the year has typically seen the Standard & Poor's 500-stock index post its fourth-best average monthly performance. This time around, November bucked the trend. The S&P 500 fell 5.1% through the 29th of the month, which represented the worst monthly performance this year. In fact, it's the worst one-month performance since December, 2002.
The S&P 500 has recorded four monthly declines this year, which, interestingly, is not far from the average of five per year since 1929, 1945, and 1970. This month, the decline felt harsher than prior drop-offs, as eight of the 10 sectors in the 500 fell in the month, and 83% (107 of 129) of the subindustries in the broad benchmark posted a decline, led by Thrifts & Mortgage Finance (down 38% for the month), Homebuilding (off 28% in November, 67% on the year, and more than 77% from its high in 2005), and finally, IT Consulting & Other Services (down 23% on the month).
There were some bright spots. Strength was concentrated in the defensive groups of Consumer Staples, Health Care, and Utilities this month, with Health Care the clear leader. Health-Care Facilities jumped 30%, while Health-Care Services rose 7.3% and Managed Care companies gained 5.5%.
Thanksgiving for Bears, Christmas for Bulls
There is an old Wall Street saying that while the bears have Thanksgiving, the bulls have Christmas. Since both November and December have recorded above-average monthly returns and below-average frequencies of monthly declines since 1945, one has to conclude that this saying relates to the days just prior to each holiday, not the entire month. I think it is fairly easy to figure out why optimism grows during the final month of the year: The current year is nearly behind us and the focus has shifted to the year ahead, complete with optimistic earnings growth projections and price appreciation projections.
But what about this time around? S&P's Investment Policy Committee has a yearend 2007 price target of 1560 for the S&P 500, which indicates a 10% price appreciation for the full year and a 6% jump for the month ahead. This appears to be a tall order, but certainly not out of the question, in our view, as the S&P 500 has risen more than 6% in three Decembers since 1945 (it rose more than 5% 10 times).
A catalyst for an advance includes another 25-basis-point interest rate cut by the Federal Reserve at its Dec. 11 policy meeting (talk of a possible 50-basis-point cut is growing on the Street), as we earlier thought they would wait until January for the next rate cut. Another catalyst may be a decline in oil prices to our 2008 full-year average estimate of $84.67 per barrel.
Considering the Averages
The historical averages since 1990 indicate that the S&P 500 Industrials (XLI) and Financials (XLF) sectors were the leaders during December, while the Information Technology (XLK) and Energy (XLE) groups were traditionally the laggards. Be advised, however, that past performance is no guarantee of future results.
In addition, S&P's Equity Strategy group has an underweight recommendation on the S&P 500 Financials sector, as we believe this group will continue to underperform the S&P 500 over the coming six to 12 months due to EPS uncertainties, and an overweight recommendation on the S&P 500 Information Technology sector, as we see strong year-ahead EPS growth and a favorable tailwind from its above-average international sales exposure.
On a subindustry level, Homebuilding, Health-Care Equipment, and Broadcasting posted the best historical frequencies of outperformance since 1990, while selected retailers and consumer-led subindustries posted the lowest average returns and frequencies of outperformance for the past 17 Decembers.
While it may be intellectually stimulating, and even occasionally profitable, to be aware of, and even embrace the groups that have historically done well in a particular month, we would not advise investing your hard-earned dollars based solely on past single-month returns.
Industry Momentum List Update
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 subindustries in the S&P 1500), along with a stock with the highest S&P STARS (tie goes to the highest market value).
S&P STARS Rank
Auto Parts & Equipment
Standard Motor (SMP)
Coal & Consumable Fuels
Peabody Energy (BTU)
Lyondell Chemical (LYO)
Construction & Engineering
Jacobs Engineering (JEC)
Construction & Farm Machinery
Diversified Metals & Mining
Career Education (CECO)
Fertilizers & Agr. Chem.
Laboratory Corp. (LH)
Air Products (APD)
Thermo Fisher (TMO)
Tires & Rubber
Goodyear Tire (GT)
Source: Standard & Poor's Equity Research