Worst Performing Sectors of 2016

2016 has been a trying time for the global financial markets, as low oil prices, weak growth and volatile financial markets led to one of the worst starts to a year on record. While the markets have rebounded sharply from their February lows, overall returns remain dismal. Some analysts fear that a deepening earnings recession on Wall Street could threaten the latest rally and send stocks tumbling. Others are keeping an eye out on an increasingly volatile Chinese economy that continues to be fueled by credit.

These and other macroeconomic forces are unlikely to go away anytime soon. Investors remain hopeful that rebounding oil prices and ultra-loose monetary policy in the United States, Europe and Japan can keep these negative forces at bay for the rest of the year.

Surprisingly, only two of the S&P 500’s ten main sectors have posted negative returns in 2016. Several others have posted only meagre gains, reflecting the massive selloff at the start of the year. Below we look at three sectors every investor needs to be weary of, as they’ve been prone to extreme volatility through the first four months of the year.

Financials

Financials have been by far the worst performing sector on the S&P 500. Within financials, banks have been especially volatile. The banking sub-sector has declined nearly 6% this year (they were down more than 12% through early March) on downshifts in the business cycle and a more difficult lending environment.[1] JPMorgan Chase & Co recently reported a profit decline of 6.7% in the first quarter, with per share earnings falling to $1.35 from $1.45. Surprise, surprise, JP’s stocks rose because the dismal earnings were better than expected.[2] That just goes to show you that if you set the bar low enough, you can easily beat expectations.

Bank of America had a similar story: the company’s profits plummeted 18% in the first quarter, but that wasn’t as bad as what analysts had expected.[3]

Despite the latest rebound in bank stocks, negative yields continue to threaten bank profits. That’s because yield curves are flattening worldwide, while bank net interest rate margins are also getting slimmer.[4]

Healthcare

Healthcare is the other major S&P 500 sector to report declines through the first four months of 2016. Within healthcare, biotechnology and life sciences shares have been especially volatile. Both sectors have declined around 5% year-to-date. In fact, a volatile biotechnology sector has been largely to blame for the Nasdaq’s negative return for the year. Whereas the Dow Jones Industrial Average and S&P 500 have entered into positive territory for the year on the strength of a two-month rally, the technology-heavy Nasdaq is down 2% since January 1.

Healthcare, normally one of the better performers on the New York Stock Exchange, has been pressured by a proposed budget plan from the White House vowing to cut payments to private insurance companies.[5] Pharmaceuticals also took a big hit earlier this year after US President Barack Obama announced plans to combat high drug prices, which have been a major talking point on the campaign trail.[6]

Consumer Discretionary

Consumer discretionary stocks are among the most sensitive to economic cycles. It’s no wonder they’ve experienced significant volatility through April. The US economy is on pace to grow less than 1% annually in the first quarter, with some estimates showing a near standstill in economic growth. Within the consumer discretionary component, stocks tied to automobiles, internet and even education have been hit especially hard.

Global growth forecasts have been revised down repeatedly over the past 12 months, as both advanced and industrialized nations struggle with domestic and international headwinds. Consumers’ penny pinching doesn’t bode well for this sector.

Information Technology

Software, internet services and semiconductor stocks have all experienced what some analysts have described as a “technology bloodbath.”[7] Weak earnings, declining PC shipments and volatility in China are all to blame for the dismal performance of tech shares through the first quarter.[8]

Global software giant Microsoft recently posted dismal first quarter earnings, which wiped out over $30 billion in the company’s market value as its share price plunged over 7% in one day. That was the worst single-day performance in a year.[9] Alphabet Inc., Google’s parent, also missed on first quarter earnings estimates, leading to a sharp decline in its share price.

Large tech players, such as Intel and Microsoft, are struggling to keep all of their business streams profitable, as the market continues to shift away from traditional PC computing toward cloud, mobile and other emerging tech solutions. As this process intensifies, expect more headwinds for the mighty technology sector.

The global financial markets have been remarkably stable since the six-week selloff that kicked off 2016. However, a haze of uncertainty concerning China, oil prices and the individual consumer could present renewed challenges for equities. This is apparent by rising demand for gold, silver and other risk-off assets. Silver prices have skyrocketed over 25% since the start of the year, while gold has also enjoyed a double-digit percentage gain. Investors should keep a close eye on the macroeconomic data and key technical levels for the major indices. This could help them navigate the direction of the overall market.

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[1] Tom DiChristopher (March 3, 2016). “Why it’s a good time to buy bank stocks: UBS analyst.” CNBC.

[2] CNBC.com Staff (April 14, 2016). “JPMorgan earnings beat expectations.” CNBC.

[3] CNBC.com Staff (April 14, 2016). “Bank of America posts earnings of 21 cents a share vs. 20 cents estimate.” CNBC.

[4] Tom DiChristopher (March 3, 2016). “Why it’s a good time to buy bank stocks: UBS analyst.” CNBC.

[5] Tim Paradis. “Stocks fall as fears of budget proposal impact hit health care stocks.” ABC News.

[6] Peter Sullivan (February 26, 2016). “Drug industry on edge for Obama action on prices.” The Hill.

[7] Stephen Gandel (February 5, 2016). “Only Six Nasdaq Stocks Escaped Today’s Technology Bloodbath.” Fortune.

[8] Tae Kim (January 15, 2016). “Not just oil and China, tech is falling apart.” CNBC.

[9] Tomi Kilgore (April 22, 2016). ‘Microsoft’s stock plunge wipes out over $30 billion in market value.” MarketWatch.

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