Last week, investment bank Goldman Sachs (NYSE: GS) reversed its direction on industrial stocks, telling clients to stop betting that the sector would outperform stocks of consumer companies that sell basic necessities. The Goldman call cited a lack of upcoming reports that could boost investor optimism about economic growth.
The turnaround in Goldman’s position on industrial stocks brought both the Industrial Select Sector SPDR Fund (NYSE: XLI) and the Consumer Staples Select Sector SPDR Fund (NYSE: XLP) smack dab into the spotlight.
It wasn’t that long ago that Goldman recommended investors take a long position in XLI — that’s the industrial one, relative to XLP – the consumer one. But after Goldman analysts changed their minds, they attempted to explain the decision by writing, “With the market’s views of economic growth still range bound, and heading into a ‘data-light’ portion of the economic calendar following Friday’s payroll report, proximate catalysts for the improvement of the equity market’s view of economic growth are no longer as clear.”
Those words are analyst-speak for — we’re not sure where the economy is going.
Traditionally, industrial stocks are more sensitive to the overall economy while consumer staples stocks are considered relatively immune from shifting economic tides. The way Goldman figures it, the less we know about the short-term economic future, then the less certain we are about industrial stocks.
Many of the stocks open to this uncertainty are industrial giants that make up XLI. The top five holdings in this exchange-traded fund (ETF) are General Electric (NYSE: GE), United Technologies (NYSE: UTX), Caterpillar (NYSE: CAT), United Parcel Service (NYSE: UPS) and 3M Company (NYSE: MMM). Over the past four weeks, the fund has been virtually flat, falling 0.02%. However, during the past 12 months, XLI has posted an impressive 21.3% gain vs. the S&P 500’s relatively modest 16.9% showing.
If Goldman is right, then we could see a continuation of the decline in XLI that we’ve witnessed over the past four weeks. Aggressive options players who agree with this thesis can bet on a potential decline with the XLI Jun 2011 37 Put.
In contrast to that industrial ETF, there’s been a 3.4% move higher over the past four weeks in XLP, the consumer ETF. Its top five holdings are Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), Wal-Mart Stores (NYSE: WMT), Coca-Cola Company (NYSE: KO) and Kraft Foods (NYSE: KFT).
Over the past 12 months, XLP has delivered a 16.9% gain, the same as the S&P 500 Index’s performance, but inferior to the one-year gains in XLI. If Goldman is right, and a cloud of economic uncertainty grays the skies, then a bullish bet on these safe-haven, defensive consumer staples stocks could be a big winner. Options players willing to take that bet should look at the XLP Jun 2011 32 Call.
As of this writing, Jim Woods held no positions in the funds mentioned in this article.
