If you are looking to generate returns via equities in 2013, you may be wise to avoid consumer stocks, as these financial instruments may produce lackluster performance after producing five years of above-market results.
James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, recently told Bloomberg that consumer cyclical stocks may lag the greater market for equities, even though retail spending could receive upward pressure from increasing prices for homes, a job market that is steadily improving and price levels that have risen at comfortable rates.
He said that all these positive economic tailwinds are already reflected in the stocks contained in the Standard & Poor's 500 GICS Consumer Discretionary Sector Index, which has managed to outperform the broader asset markets by an average of 58 percentage points since 2008. This would be the longest period of the consumer discretionary equities outperforming the entire S&P 500 since 1990.
Strong retail stock values
Forbes reports that in 2012, consumer stocks traded at valuations that seemed to defy existing measures of consumer confidence. During the period, the shares of retailers traded at levels that were either at record highs or multi-year highs. In addition, measures of confidence consistently remained in the negative range, although they did fluctuate during the year.
An example of how dire the year's consumer confidence readings were is the Conference Board's December reading on consumer confidence, which plummeted to 61.5 in December from 71.5 in November, according to the news source. These figures compare to readings between 90 and 110 – which signify neutrality in sentiment.
Paulsen told Bloomberg that global investors have been 'paying up' for the estimated earnings growth that stocks contained in the consumer index will hopefully enjoy. He asserted that since there are various opportunities cropping up in the broader asset markets, "these stocks may just mark time, even though their fundamentals probably will hold up."
According to the news source,The S&P 500 Industrials Index is one of the 'better opportunities' that Paulsen will be investing in during 2013. He stated that after suffering a period of underperformance between February 2, 2012 and September 25 of that year, these equities have a more favorable value and should be supported by a trend of emerging economies picking up in terms of growth.
Paulsen's assertion that economic expansion is accelerating in these emerging markets is supported by a spate of Chinese data. Data provided by the National Bureau of Statistics and China Federation of Logistics and Purchasing indicated that a measure of manufacturing activity in the nation was above a reading of 50 for the third consecutive month, which indicates that this sector has been expanding for three straight months.
In addition, economists taking part in a recent Bloomberg News poll predicted that the growth rate of the world's second-largest economy will increase to 8.1 percent in 2013 after being 7.7 percent in 2012, according to the median estimate provided by these market experts.
Paulsen is certainly not the only market expert warning that consumer stocks could encounter trouble in the near future, with Eric Teal, chief investment officer at First Citizens BancShares Inc., predicting that global investors will start selling stocks they have in the consumer index before the underlying companies release lackluster earnings results, according to Bloomberg. He stated that this will happen in spite of these equities continuing to have 'strong performance.'
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