Equity Sector Surprises…the Highs and Lows of 2014

Posted on: 01/07/2015

tallbuilding2014 was a year of highs and lows, as is every year, but in this case “high” actually means “record high” because both the S&P 500 and the Dow Jones Industrial Average saw record highs last year.

Here is our list of the “equity surprises” we saw in 2014. We’d like to know what you think! Please leave your comments.

  1. Utilities
    1. Utilities was the best performing sector in 2014, up 27% compared to positive 13% for the S&P 500.
    2. Since earnings growth rates do not increase much in the utilities sector during times of strong economic growth, the sector usually lags the rising stock markets that tend to take place during these times.
    3. Utilities outperformed other sectors in 2014 due to:
      1. Declining interest rates leading to relatively attractive yields for utilities (the sector began the year with an average yield of over 4%).
      2. The search for safety during volatile market periods, especially in the first and fourth quarter of the year.
    4. Although these positive trends are in place as 2015 begins, these negative factors will be of concern in the new year:
      1. As interest rates increase, utilities’ dividend yields (currently at 3.45%) will become less attractive to investors.
      2. Broad positive market returns due to rising earnings and relatively low interest rates will lead to greater interest in other sectors.
  • Given the growing economy, the need for generating and distribution capacity increases will become evident leading to rising capital spending needs.
  1. Telecommunications
    1. Telecomm was one of the least attractive sectors in 2014, with a flat performance.
    2. Given Utilities’ great market action, telecom, the highest yielding sector (around 4.75%) could have also performed well.
    3. Telecomm underperformed Utilities (and the broad market) for the following reasons:
      1. The secular decline in the sector’s cash cow, land lines, continues.
      2. The mobile phone market is more competitive leading to reduced profit margins.
  • Telecom companies not only have to make capital expenditures to maintain their legacy systems, they spend large sums to build and update their mobile systems.
  • Given these secular trends in the sector, Telecommunications will likely continue to underperform in 2015.
  1. Health Care
    1. Health Care was one of the best performing sectors in 2014, up almost 27%, after outperforming the S&P 500 in 2013.
    2. Like utilities, health care tends to underperform more economically sensitive sectors during times of strong economic growth.
    3. In 2014, health care outperformed due to:
      1. The implementation of the Affordable Care Act, which brought new clients to drug and medical supplies companies and healthcare providers.
      2. Ongoing demographic opportunities from aging baby boomers.
  • Increased spending by emerging market nations that currently allocate GDP to health care at one-half the rate as Europeans and one-third the rate as Americans.
  • Strong balance sheets in the sector that allowed increased merger and acquisition activity.
  • These secular trends should continue in 2015 resulting in continued outperformance for the health care sector.

HappyNewYearRed



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