While the quarter got off to a somewhat shaky start, all of the indices moved into the green on the back of a very strong March. In terms of other factors, the quarter was rather uneventful. Treasury yields were essentially unchanged, but spread compression and a steep yield curve enabled the broad bond market to return 1.78% (Barclays Aggregate Index). While not that exciting compared to the S&P 500 returning 5.39%, it sure beat cash. For all the talk on the strength of the dollar, it was really more the weakness of the euro (+5.6%), as it was unchanged vs. the yen. Gold and Oil rallied slightly, but commodities, as measured by the CRB index, were slightly weaker (-3.5%).
Looking at stocks across market capitalization and style, here is what we enjoyed:
The table includes both the Standard & Poors (500, 400 and 600) and the Russell (1000, Mid-Cap and 2000). You can see that with the exception of the S&P 400, Value beat Growth in every instance. Working across the cap ranges, the trends favored smaller companies. As I have pointed out recently, the strength in Mid-Caps relative to Small-Caps may be related to the recent acceleration in M&A activity. This action fit in exactly with my call in early February that 2010 would be a year to "chase Alpha,"at least so far.
Looking at returns by sectors:
I have color-coded the table to highlight areas of strenth and weakness, marking areas that were 5% greater than the respective index green and those that were 5% worse in red. Keeping in mind the trends of smaller doing better generally, it is interesting that the two strongest areas for the S&P 500, Industrials and Financials, saw absolutely lower returns in the smaller stocks. Also interesting was the across-the-board weakness in Telecom Services and Utilities. While both of these sectors are very small relatively, especially in the smaller indices, they are both driven by dividend yields and considered low beta.
Reviewing highlights for each sector in order, let's first look at Energy. I have been somewhat concerned about at least Natural Gas, most recently describing potential "profitless prosperity." The sector enjoyed some very strong returns, with 12 names up 10% or more (led by Smith International (SII), which received an acquisition offer). Still, five names declined more than 10%, and the four largest stocks (XOM, CVX, COP and SLB) returned between -2.5% and 0.2%.
Materials also experienced a range of performance, with 8 double-digit gainers let by Cliff's Natural Resources (CLF), Airgas (ARG) and Titanium Metals (TIE), the latter two of which were involved in actual or rumored M&A activity. Still, 4 names posted double-digit declines.
Industrials were the place to be in Large-Caps, led by GE, at least in terms of contribution since it was up a stunning 20%. In fact, though, more than 1/2 the components rose 10% or more, with just a single double-digit decliner. More than 10% rose in excess of 20%. This broad rally was even more impressive considering the strength in the dollar during the quarter.
Consumer Discretionary performed very well, just like Q1 of 2009. While it was even better for smaller companies, the S&P 500 names fared very well, with just three double-digit decliners and an astounding 25% returning more than 25% during the quarter. The performance was very broad, across industries.
Consumer Staples saw just one dog (Dean Foods (DF), which fell 13%), while several stocks rose in excess of 20%, including Tyson Foods (TSN), Estee Lauder (EL), Whole Foods (WFMI), Supervalu (SVU), Coca-Cola Enterprises (CCE) and Dr. Pepper Snapple (DPS).
Healthcare saw just one major disappointment (Boston Scientific (BSX)) and thus responded fairly well to the political headlines. 16 of the 52 names rose more than 10%, led by Millipore (MIL), which is being acquired. The four largest names, all with heavy exposure to pharmaceuticals, held the sector back, with none of them rising more than 2.2%. So, lots of names are working, just not the big guys.
Financials, the dogs of the past couple of years, enjoyed quite the resurgence, with not a single stock falling more than 7%. More interesting, much of the performance was driven by the very largest names, as the four with market caps in excess of $100 billion rose an average of 15%. I personally don't expect this to continue, but I don't have a lot of conviction that it won't. As long as interest rates remain zero, these guys can't help but print profits.
Technology was not a leader for the first time in many quarters. It wasn't so much that the sector endured any fundamental chages, but rather it looked simply like rotation. 17 of the 75 names rose more than 10%, while only four fell to that degree. 3 of the top 5 names fell, including Microsoft (MSFT), Google (GOOG) and IBM.
Telecommunication Services was all about ATT (T) and Verizon (VZ), as they represent the vast majority of the market cap in this sector. Still, it was hard to find winners among the other 7 names.
I like Utilities and said so recently. They had a crappy quarter, creating the entry that I see. Part of it was due to the regulatory environment, while part may be due to fears about rising rates. Only one name was up in excess of 10% (Integrys (TEG), one of the highest dividend yields in the sector), while a stunning 7 names fell by more than 10%.
So, that's what the first quarter looked like. I have been preparing for a possible pullback here, but I don't see it quite yet. In any event, I don't expect it to last for even an entire quarter if it does happen. I continue to watch for a break of 1230 on the S&P 500 as a potential indicator that the bear market is actually over. Wouldn't that be nice!
Disclosure: No position in any stock mentioned
Comments