Sectors underperforming in the months before a bear bottom often outperform in nascent bull markets—Materials, Energy, Industrials, and Consumer Discretionary in this case.
Beyond a sentiment bounce, fundamentals largely tell the same story. They may not be booming yet, but will be sooner than you think—and stocks will anticipate the recovery.
"Early to bed, early to rise makes a man healthy, wealthy, and wise." Maybe so. But luckily, investors don't have to greet the wee hours, coffee in hand, to take advantage of early risers after a bear market.
Sectors underperforming in the months before a bear bottom often outperform in nascent bull markets—when sentiment turns on a dime, reversing overly bearish stock sales to extremely bullish buys. In today's market, those bullish buys will likely be Materials, Energy, Industrials, and Consumer Discretionary stocks. All fell hardest six months prior to the March bottom and have since performed best. (Financials could be added to this group, but we doubt Financials' long-term outperformance as they labor under a stock supply glut and the federal yoke.)
From a sentiment standpoint, it makes sense these beleaguered categories should bounce most. But do fundamentals tell the same story? Don't the above sectors, typically seen as economically sensitive, do best in hale economies? And aren't we still smack in the middle of a recession? Take Materials. Across the globe, the recession's taken a toll on home, commercial, and infrastructure building. Who'd want to buy mining stocks when no one's putting up bridges, bungalows, or office buildings?
It's all too true many Materials drivers haven't picked up just yet—but the recession won't last forever. Even the most pessimistic admit we'll likely see some kind of recovery in the next six months to a year. The coming economic revival should drive demand higher, especially as emerging markets resume developing domestic resources. Plus there's a huge amount of fiscal stimulus targeted at infrastructure investment across the world—from the US to China. All that government spending should further boost demand.
And don't expect Materials supply to increase fast. The intensive nature of raw materials extraction largely fixes supply in the near term, making it slow to react to quicker changes in demand. Rising demand and stable supply should juice prices and profits for Materials firms—even sooner than you think. Of all the early risers, Materials stocks tend to be particularly bright-eyed and bushy-tailed. Planning and ordering for big, intensive projects begins months before work gets underway. This is already evident in some raw materials prices. For instance, iron ore, copper, and aluminum imports to China have all spiked recently to record levels. Spot iron ore prices are rising after annual contract prices took a smaller than feared 33% cut.
With early-bird watching binoculars firmly in hand, Materials stocks will likely discount all the coming action many months in advance, leaving those waiting for an official "all's clear" in the dust. Night owls and early risers alike should snap up the early birds for the juiciest bull market returns.