We’re in the midst of a sector rotation in which shares of super-defensive drug and food makers like Pfizer Inc. (NYSE:PFE) and Procter & Gamble Co. (NYSE:PG) are slipping while shares of super-cyclical materials producers and transports advance.
I expect cyclicals like FedEx (NYSE:FDX), ExxonMobil (NYSE:XOM) and ConocoPhilips (NYSE:COP) to perform well going into the second half of 2013, as long as this rotation from relatively expensive staples to relatively cheap industrials continues. But will it? That’s one of the main questions that advisors are receiving right now from investors who are wondering whether the 2013 rally is unusual, and whether it has the potential to persist. The answers may surprise you.
The S&P 500 is up 13.5% so far this year, which sounds great — and it is. But according to analysts at Bespoke Investment Group, it’s only the eleventh best start to a year through the first week of May since 1928. The market started the year at almost exactly the same pace in 1995, gaining 13.25% through 87 days, and it was much stronger in 1987, at a 22% gain through 87 days. The start of 1991, which featured the Persian Gulf War, saw the market advance 15.1% in this span.
It is very interesting to observe that 1995 is in the data set. You have heard me say a few times that 2013 reminds me of that year quite a lot in its relentlessness. And now that we have a little more than four months under our belts, we can see that indeed the analogy, or similarity, is quite strong.
The year 1995 was one of the best for the stock market in the past three decades. Yet, just like the start of this year, which began with the kerfuffle over the so-called fiscal cliff, it sure did not seem to be very promising at all on the surface.
Now if you think, well, 1995 was an ideal time — the start of the dot-com boom, blah blah blah — think again. The world at present is a cakewalk compared to 1995.
Coming off the 1994 recession, people came into 1995 with long faces. A jobless recovery was just about to get underway, and economists and journalists complained constantly that the stock market should not be advancing amid an economy that was struggling to create employment. Sound familiar?
Early in the year came the near collapse of the entire Mexican financial system, later known as the peso crisis. Timothy McVeigh blew up a federal building in Oklahoma City in April. The Bosnia War reached its heartbreaking and murderous climax in July. By September, NATO was attacking the former Yugoslavia with 400 aircraft from 15 nations. In November, a religious fanatic assassinated Israeli Prime Minister Yitzhak Rabin.
I mean, really, 1995 was a very messed-up year. And yet the stock market kept rising, in part because companies were improving their productivity with new enterprise software and keeping their labor expenses low by not hiring much. The Internet boom was just barely getting started, with Yahoo! (NASDAQ:YHOO) born quietly that year with no fanfare in Silicon Valley, while Amazon.com (NASDAQ:AMZN) was begun quietly by Jeff Bezos in Seattle in January. Neither would go public for another couple of years.
Economic growth was certainly slow in the first half of 1995, but got traction in the second half of the year — and then the second half of the 1990s became legendary. But it all started with stocks sniffing out the success that lay ahead in the first half of 1995.
And I now wonder whether it is possible that the same investors’ instincts are collectively sniffing out an economic rebound in the second half of this year. Think about that. The view actually fits neatly with the remarkable rotation that we see going on in the stock market right now.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days.
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