The chart above segments the returns for the first half of 2008 (January - June; blue bars) and the second half to date (July - October; red bars). The first set of bars represent the returns from the S&P 500 Index (SPY); the remaining sets represent the Materials sector of the S&P 500 universe (XLB); the Energy sector (XLE); and the Financial sector (XLF).
If we just look at the S&P 500 Index, it appears that weakness has been relatively consistent from the first half of the year to the second half. Within the index, however, there has been little consistency. During the first half of 2008, the Materials sector was basically unchanged and the Energy stocks sported a double digit gain, while Financial shares were down 30%. In the second half of the year, with the collapse of commodities, the Materials and Energy stocks within the S&P 500 Index have underperformed, while Financial shares have actually outperformed the overall index.
One interpretation of this shift is that market participants have changed their views of threat from stagflation to one of outright recession and deflation. Although both views are negative for stocks overall, they have important implications for specific market sectors. Meanwhile, the sector outperformer during both halves of the year was XLP, the Consumer Staples stocks. Sticking to defensive, relatively recession-resistant stocks has been the best strategy thus far in 2008, though even XLP is down over 5% on the year.
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