With the benefit of twenty twenty hindsight, it is little wonder the Financials sector has been such a strong performer since the March low, after all it was among the worst performers leading into it. Also not surprising is that Listed Property Trust fared the worst of the Australian sector groups during the decline due to the meltdown of the housing market in the US.
What is surprising to many no doubt, is that the seemingly safest stocks have underperformed the market. During the most fearful period in the market for most people’s lifetimes, it is natural that the most would look to the ‘safest’ stocks, if any at all. A quick search of the news stories from back in March confirms this, with examples like these:
9th March ‘09 - “As such, I believe that consumer staples are generally a safer haven in this kind of environment.”
24th March ’09 - “…That should make you focus on consumer staples -- companies that sell things you can't do without -- rather than consumer discretionary stocks.”
…and it makes sense. Stocks like McDonalds (MCD: NYSE) should surely perform well as people cut back on more expensive choices. The same could be said for the likes of WalMart (WMT:NYSE) or Woolworths (WOW:ASX) in Australia. These two companies both sell basic items that we all need and should surely outperform stocks like Ralph Loren (RL:NYSE) or Tiffany’s (TIF:NYSE) that sell items considered luxuries, especially during a recession. Surprisingly though, Ralph Loren and Tiffany’s are each up over 150% since March, while Woolworths and McDonalds are up 16% and 27% respectively.
This trend continues at a sector level in the two charts below.
Chart 1 – ASX Consumer Staples Sector Index
click to enlarge
Consumer Staples are up 32%, while Consumer Discretionary is up 70%.
Chart 2 – ASX Consumer Discretionary Sector Index
click to enlarge
Instead of outperforming the Consumer Discretionary stocks, Consumer Staples not only underperformed them, but also the index.
Now the names and sources were omitted from the earlier quotes as the idea here isn’t to name and shame, but simply illustrate a point, which is that markets will rarely follow the ‘conventional wisdom‘ at the time - unless in a bubble. The fact that staples were going to be a popular choice, by nature made them less likely to be the best choice. And therein lies the problem; markets by nature will fool most people, most of the time.
Now it should be noted that Consumer Staples (ASX) are only 17% off their 2007 highs, compared to 46% for Consumer Discretionary stocks. So from a longer-term perspective, they are still ahead. However, the point of this exercise was to measure the performance based on suggestions from March of this year.
So it is all well and good for me to point out where others have made mistakes, but what value does this finger pointing offer anyone? Well benefiting from this kind of thinking in the future requires us to identify areas in the market where this kind of popular opinion exists.
One such area I have mentioned many times in the last few months is the need for a retracement and the lack of bullish commitment. While so many are still nervous about stocks, based on the logic above this is a positive for the stock market.