Trash is King

Since the recent stock market rally began on March 9th, the S&P 500 is up 28%. Interestingly, the market sectors that were beaten down the most since the crash that began on October 9th, 2007, are the sectors that have performed the best during the current surge. Financial stocks, down about 70% during the market pullback, are now up 76% from their market lows. Industrials, which dropped 50% during the decline, are now up about 45% since the recovery.

It had been widely believed that the best place to be whenever stocks recovered would be high-quality companies with the resources to tough out an extended difficult economic environment. Instead, companies with high levels of debts and poor rates of return on equity have comeback the strongest.

It’s not uncommon for the sectors that were hit hardest during the market collapse to lead the comeback. The same happened in 2003. However, some believe the rebound is going to have to quickly transition to high-quality stocks in order to be sustainable. The more optimistic view is that despite the lopsided nature of the recent rally, the rebound has been broad-based and that most stocks, regardless of sector or quality, have been participating.

This is a heavy week for earnings reports. Companies reporting include Pfizer, Office Depot, Sun Microsystems, U.S. Steel, Starbucks, Visa, Comcast, Exxon, Dow Chemical, MetLife, and Chevron. Stay tuned.