Though recent volatility and low volume has created a bit of malaise on Wall Street lately, let’s not forget that the market has staged a very nice rally since the start of the year. The S&P 500 is up almost 13%, and some highflying blue-chips have delivered even bigger returns.
So which sectors have performed best in 2012? Here’s a breakdown, using the SPDR sector ETFs as a benchmark for performance:
- Consumer Discretionary SPDR (NYSE:XLY) — up 21%
- Consumer Staples SPDR (NYSE:XLP) — up 11%
- Energy SPDR (NYSE:XLE) — up 4%
- Financial SPDR (NYSE:XLF) — up 23%
- Health Care SPDR (NYSE:XLV) — up 17%
- Industrial SPDR (NYSE:XLI) — up 11%
- Materials SPDR (NYSE:XLB) — up 9%
- Technology SPDR (NYSE:XLK) — up 13%
- Utilities SPDR (NYSE:XLU) — down 1%
And which sectors are the most important as we turn the page on a new year? Here are the ones I’m watching: technology, consumer discretionary and financials. And here’s why…
The tech sector has seen quite a crazy year. Some big events have gone down at some big-name stocks, but the highlights include:
- Facebook (NASDAQ:FB) held its mammoth IPO and made a big-ticket buyout of Instagram; the stock crashed out of the gate but has since stabilized. Will the Facebook rebound stick now that it has firmed up?
- Apple (NASDAQ:AAPL) launched the iPad Mini, the iPhone 5 … but tallied some earnings misses, and recent declines have taken the polish off this one-time momentum darling.
- Research In Motion (NASDAQ:RIMM) is down more than 90% from its 2008 peak, but some BlackBerry believers think the BB10 launch will save the company.
- Microsoft (NASDAQ:MSFT) is in the same boat as RIMM with its do-or-die reboot via Windows 8 and the Surface tablet. Can MSFT get its mojo back thanks to these gadgets?
- Google (NASDAQ:GOOG) has made a big push into hardware with its OEM line of Nexus products, built partially on the fruits of its 2011 Motorola Mobility buyout for $12.5 billion. Elsewhere it faces challenges in its advertising business due to difficulties in monetizing mobile.
Technology always moves fast, but the consumer electronics space has been a volatile mess in 2012 thanks to the evolving mobile landscape and the increasing power of a few well-heeled tech companies at the top.
What will 2013 hold for big names like Apple, Facebook and Microsoft? And beyond consumer technology, how will the business cycle affect upgrades in corporate IT — and stocks like Cisco (NADSAQ:CSCO) and Oracle (NASDAQ:ORCL)? How will cloud computing evolve?
Technology stocks outperformed in 2012; they may not do the same in 2013, but you can bet there will be fireworks in this fast-moving sector either way.
The consumer discretionary sector has seen some bounce in 2012 — partially due to big spending on consumer technology thanks to the trends hinted at above, but we’ve also seen some signs of life in retail sales and auto sales and even the housing market.
Consider Home Depot (NYSE:HD) and Target (NYSE:TGT). The big-box retailers are up 50% and 20% year-to-date, respectively, thanks to the return of consumers. The story is the same in big-picture data, including a recent BluFin consumer confidence report that hit a six-month high, and this after the consumer sentiment index from Thomson Reuters and the University of Michigan hit a five-year high in October.
Now, I’m not going to trot out that old myth that 70% of GDP is consumer spending, because it’s not. But it is undeniable that consumers — particularly American consumers — carry a heck of a lot of economic clout. It’s impossible for any recovery to happen if Joe Sixpack isn’t buying six-packs — and it’s impossible to think we aren’t in full-on rally mode if Joe Sixpack is out buying more 66-inch LCD TVs.
As with technology, it’s impossible to know whether the outperformance of this sector will continue in 2013. But holiday sales seem brisk, and it’s pretty much a lock that whatever happens in consumer discretionary spending will mirror how the macro picture looks for investors as a whole in the New Year.
And if you think a rally can’t happen without consumer stocks, a rally really can’t happen without the banks. After all, these institutions are intrinsically linked to economic activity through mortgages, small-business lending and consumer debt.
I know it’s a hard thing to say after the “too big to fail” nonsense and a lot of the enmity toward major financial stocks, but we should all be rooting for financials in 2013. Because if it’s a bad year for banks, it’s safe to say it could also be a bad year for the consumers and businesses who use these banks on a daily basis.
We’ve seen signs of life in major banking stocks lately — including Bank of America (NYSE:BAC), which has nearly doubled year-to-date, and others like Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) that have tallied returns of more than 20% since Jan. 1. That’s due at least in part to a pickup in mortgage lending on the back of a nascent housing recovery, and investors are starting to think the worst is past for some of these big banking stocks.
A double dip in bank stocks could mean a double dip for the economy in general. But if these gains stick and financials move higher, it could indicate a pickup in lending and core business that would ultimately mean big things for the broader economy.
So like it or not, you should be watching banks in 2013 — and hoping for their success. Because it will be awfully hard for any stocks in your portfolio to do well if the financials break down in the New Year.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he held a long position in Apple but no other stocks named here.