Talk about a tough month. The Standard & Poor's 500-stock index fell 8.7% in June, the worst monthly performance since September, 2002 (–11.0%) and the worst June since 1930 when the S&P 500 plummeted 16.5% (in June, 1962, the "500" was down 8.2%). During the month, 91% (117 of 129) of the industries in the S&P 500 declined, with 64—almost half of all subindustries—slumped by 10% or more. Obviously, the market's action in June created many "Maalox moments."
For the quarter, even though the S&P 500 declined 5.6%, the S&P MidCap 400 rose by a similar amount, while the S&P SmallCap 600 eked out a 1.1% gain. On an S&P 500 sector level, four groups advanced—from 3.3% for Information Technology, to 14.9% for Energy. On the downside, six groups saw red ink: from a 2.7% slump for Health Care, to a 17.3% free fall for Financials. Of the 129 subindustries in the S&P 500, 61% were in the red for the quarter, with 34 declining by double digits.
The worst performers for the quarter were the Casinos & Gaming, Regional Banks, and Homebuilding groups, off more than 30% each, while eight subindustries were up by more than 20% each, led by Coal & Consumable Fuel's gain of 63.1%.
Coal Takes the Top Spot
Since the market top on Oct. 9, 2007, the S&P 500 has fallen 18.3% and remains about 10 points above the 1270 level that S&P's Mark Arbeter believes will be the low for this corrective action. Both the S&P MidCap 400 and SmallCap 600 indexes also posted double-digit declines since the October high. Only the S&P 500 Energy sector advanced since the market's top last year, while the remaining sectors declined from about 3% for the S&P Materials index to more than 42% for the S&P Financials.
Even though only 17 subindustries are in positive territory since the Oct. 9, 2007 high, 10 gained by more than 20% with Coal again taking the top spot, surging nearly 100%. The worst performers consisted of 58 (45%) subindustries that are now in bear-market mode, after having lost more than 20% of their value. Sixteen subindustry indices fell by more than 40% since October, led by declines of more than 50% for Automobile Manufacturers, Consumer Electronics, Other Diversified Financial Services, Regional Banks, and Thrifts & Mortgage Finance.
Oversold on a Near-Term Basis
If there is any consolation to the abysmal performance by the equity markets in the month just passed, it's the S&P 500's ability to stage a recovery—if only for a month. Since 1945, whenever the S&P 500 has declined by 8% or more in a single month—which has happened 21 times—it has risen in 14 succeeding months (67%), gaining an average of nearly 1.0%.
With each passing day investors have received less encouraging forecasts about oil prices, the economy, and corporate earnings, just to name a few. Yet market advances and declines typically occur in a stair-step fashion. Neither bulls nor bears charge in one direction forever. We currently believe the market has been oversold on a near-term basis because of these encroaching concerns, as well as end-of-quarter "window dressing" by mutual funds.
And while we think the risk has now tipped in favor of the S&P 500 breaking below its recent low of 1270, we think the market soon will experience a near-term, counter-trend bounce. How it performs subsequent to that bounce (or even if it never materializes) will be the key.