Investors’ Blueprint for Another Euro-Crisis

by Daniel Putnam | May 7, 2012 1:15 pm

The warm weather is upon us, and with it comes all the usual signs of spring: The flowers are blooming, the Cubs are in last place, and investors’ fancy is turning to thoughts of the European debt crisis.

This weekend, Socialist challenger François Hollande rode to victory over conservative Nicolas Sarkozy in France, raising concerns that Germany has lost its lead partner in promoting austerity and attempting to drag Europe out of its economic morass. Elsewhere on the continent, anti-austerity parties in Greece gained power in the county’s parliamentary elections, setting up a political stalemate and casting doubt on authorities’ ability to “ring-fence” the nation’s crisis.

The market’s initial reaction to these developments was muted, but the broad implications are important: The European debt crisis, which has been largely in the background since the start of the year, looks set to move back into the headlines.

While the more active role of the European Central Bank might signal that the downside is more limited this time, investors still need to be prepared for another summer of volatility.

To gain a sense of what another round of crisis worries might do to the markets, consider the information in the table below. These show how the major sectors and asset classes performed during the height of crisis worries in both 2010 and 2011:

Security Ticker 5/3/10-
S&P 500 ETF SPY -14.68% -17.89%
Select Sector SPDR-Energy ETF XLE -18.14% -28.83%
Select Sector SPDR-Materials ETF XLB -17.06% -28.19%
Select Sector SPDR-Industrials ETF XLI -18.32% -22.45%
Select Sector SPDR-Technology ETF XLK -14.12% -13.32%
Select Sector SPDR-Financials ETF XLF -17.73% -26.12%
Select Sector SPDR-Consumer Discretionary ETF XLY -17.98% -17.37%
Select Sector SPDR-Technology ETF XLK -14.12% -13.32%
iShares Dow Jones U.S. Telecommunications Sector Index Fund IYZ -9.31% -19.32%
Select Sector SPDR-Health Care ETF XLV -9.20% -13.22%
Select Sector SPDR-Consumer Staples ETF XLP -7.77% -7.24%
Select Sector SPDR-Utilities ETF XLU -7.72% -1.96%
iShares Trust Barclays 20+ Year Treasury Bond Fund TLT 10.63% 30.05%
SPDR Gold Trust GLD 2.38% 3.10%
Market Vectors ETF Trust Market Vectors Gold Miners GDX -0.59% -10.40%
United States Oil Fund USO -21.37% -23.61%
Apple AAPL -7.29% -4.75%

The results aren’t particularly surprising, but they also can serve to remind investors that they might be exposed to severe underperformance if their portfolios are tilted to certain sectors. Areas that underperformed the SPDR S&P 500 ETF (NYSE:SPY[1]) during both crisis periods include crude oil, financials, materials, energy and industrials. The usual high-beta suspects, such as steel and coal, took it on the chin particularly hard.

On the flip side, SPDR Gold Trust (NYSE:GLD[2]) and iShares Trust Barclays 20+ Year Treasury Bond Fund (NYSE:TLT[3]) finished in positive territory in both 2010 and 2011, while utilities, consumer staples, gold stocks and Apple (NASDAQ:AAPL[4]) lost ground but nonetheless provided a measure of protection.

Will history repeat itself this time around? Not necessarily. Interest rates already are at ultra-low levels, which makes it more difficult for the same degree of outperformance to occur in TLT for a third time. Also, the same performance pattern that has characterized the crisis periods already has been in place for nearly three months. The more economically sensitive areas of the market have been lagging the S&P …


… while certain defensive sectors have been holding up much better on a relative basis:


However, there are three potential opportunities afoot.

The Select Sector SPDR-Utilities ETF (NYSE:XLU[7]), GLD and the Market Vectors Gold Miners ETF (NYSE:GDX[8]) — all of which outpaced the S&P 500 during the past two Europe-driven corrections — have underperformed SPY by a wide margin so far this year. While all three continue to face headwinds, they warrant a closer look if Europe’s issues again come to dominate the headlines in the weeks and months ahead.


As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

  1. SPY:
  2. GLD:
  3. TLT:
  4. AAPL:
  5. [Image]:
  6. [Image]:
  7. XLU:
  8. GDX:
  9. [Image]:

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