If strong earnings last, U.S. defensive stocks may ebb
NEW YORK (Reuters) - If corporate America keeps up the impressive earnings show, U.S. investors may reverse the more cautious bets they've made on defensive stocks in the past month as hopes resurface for a strong economic recovery.
The S&P 500 is now up 6 percent this week after exceptionally strong reports from Goldman Sachs (GS.N) and Intel Corp (INTC.O), who wowed investors with much better-than-expected results. This week's rally also put the S&P 500 back into the black for the year.
As a result, the rally in the defensive stocks -- representing industries that sell products needed even during lean times, like utilities, consumer staples and health care -- has been put on hold.
These shares moved higher beginning in mid-June, when investors began to doubt the "green shoots" theory, and indicated that investors were stepping away from the stocks that led the March-to-May rally.
In a weak economy, investors would rather own companies like toothpaste maker Colgate-Palmolive (CL.N) than mining giant Freeport-McMoRan Copper & Gold Inc <FCX.N, whose fortunes rise and fall with the economic cycle.
"People have rotated briefly into some of the defensive names" beginning in June, said Cleveland Rueckert, a market analyst at Wall Street research firm Birinyi Associates, in Stamford, Connecticut.
He sees the defensive plays as a temporary move by investors, and expects investors will continue to focus on technology names in the weeks ahead -- if Intel's report is representative of the sector.
Back in favor are the sectors that serve as barometers for growth. The S&P industrials .GSPI and materials .GSPM indexes are up 7 percent this week, while the S&P financials .GSPF have gained 10 percent.
But some say stocks such as those in health care and consumer staples may remain strong due to investor uncertainty about whether the conditions are in place for a continued bull market: namely, the prospect of a strong economic recovery.
"Stock investors right now are trying to determine whether we have that or whether we don't," said Michael Cuggino, president and portfolio manager of Permanent Portfolio Funds in San Francisco.
DEBATE OVER DEFENSIVE PLAYS
The S&P 500 sectors that led the spring rally are still down the most since June 12. Materials and industrials fell around 13 percent by July 8 before starting to gain this week. In contrast, the healthcare sector is up 2.8 percent and consumer staples have gained 1.5 percent since June 12.
Analysts are divided as to whether this pattern will persist -- or if investors are already leaving it behind.
"This kind of environment can exist from somewhere from three to six months," said Carmine Grigoli, chief investment strategist at Mizuho Securities USA, in New York. "But it doesn't mean that there aren't opportunities out there."
Grigoli said that while he would avoid commodity-related companies after their strong run-up, he sees opportunities in healthcare, consumer staples, technology and even some financials. Grigoli said many of the defensive names missed out on most of the gains since early March and may have room to advance, while cash-rich technology companies with strong balance sheets are solid growth bets.
With the economic environment still shaky, the performance of individual names may hinge less on economic sensitivity, and more on the ability to withstand weak demand.
But the caution shown by investors could already be on the decline, particularly if others surprise on the upside to the same extent as Intel.
Bank of America (BAC.N), International Business Machines (IBM.N) and Google (GOOG.O) are among the big-name barometers set to report later this week.
(Editing by Jan Paschal)
