Trader Talk

Stocks in the first half of 2015 offer a very mixed bag

Pisani: Sectors on upside

The market action has been very uneven in the first half of the year. The is only 3 percent from its May historic high, but that is a deceptive picture.

There have been some notable sector winners, but there are also many—perhaps most—that still have modest gains for the year, but have stalled out in the second quarter. And then there is a distinct group that is in a clear downtrend.

If there was ever an argument for owning a broad portfolio of stocks, the first half of 2015 should be Exhibit 1.

First, let's look at the winners on an uptrend so far this year:

Banks have benefited from a rising interest rate environment and hopes for an improving economy, while health care, particularly biotech but also pharmaceuticals, have also been strong. The boost to HMOs and hospitals from the Supreme Court ruling on Obamacare has also bolstered the overall sector.

But there are many sectors that started the year strong, and have begun to stall in the second quarter. Two examples:

The housing numbers have shown notable improvement, as have earnings of companies like Lennar, but there is still an affordability issue hanging over the home building industry. Prices are high and getting higher, wages are still stagnant when inflation-adjusted, and the specter of higher mortgage rates have investors cautious.

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Retail has been completely schizophrenic this year: For every Macy's or JC Penney, there has been down moves from Nordstrom and Dillards. For every modest recovery in a Target, there has been a dramatic fade like Wal-Mart. Apparel has generally been a loser.

Retail (YTD):

  • Macy's: up 2 percent
  • Nordstrom: down 6.4 percent
  • Target: up 8.2 percent
  • Wal-Mart: down 8.9 percent

Then there are groups that are clearly in a downtrend year to date:

The drop in transports has caused much hand-wringing, but rapid changes in jet fuel prices have played with airlines, while decline in coal transportation have hurt railroads. Most do not believe weakness in these sectors presages broader weakness in the U.S. economy.

The most notable sector is energy. There were enthusiastic attempts to buy energy as the sector bottomed first in January, but the sector failed repeatedly as investors began to realize that there was precious little reduction in oil supply, and that it is unlikely the U.S. shale sector will see a rapid recovery in the second half of 2015. In fact, earnings estimates are still coming down for 2016.

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Utilities, REITs and other interest rate sensitive sectors have struggled as rates have risen.

While much has been made of the huge rally in China mainland stocks, the most widely owned China ETF, the iShares Large-Cap ETF, a basket of the largest stocks on the Hong Kong exchange, is up only 8 percent year to date and has been on a serious downtrend since April.

Where does this leave us? Earnings for the first half, which includes an estimate for second quarter earnings are flat, but that will change to positive as the actual numbers for the second quarter come in better than expected. The Achilles heel is again sales.

First half 2015 (source: S&P Capital IQ):

  • Earnings: -0.5 percent
  • Sales: -1.8 percent

That's what we need in the second half: sales growth. To kick start a rally we need to see sales and capital spending pick up, as opposed to cost cutting and share buybacks.

More on earnings in the second half of 2015 on Wednesday.