October 14, 2013

S&P to Lose Nearly 16% by Year End: Wells Fargo Analyst

Gina Martin Adams says consumer staples and earnings growth are likely to weaken further in Q4, though one ETF is bucking the trend

The S&P may be trading above 1,700, but a Wells Fargo analyst says it’s not likely to stay there, as corporate earnings get squeezed—especially in the consumer-staples sector.

Wells Fargo (WFC) senior analyst Gina Martin Adams, who spoke with CNBC over the weekend, sees the major index at 1,440 by year end, or down nearly 16%. She also moved consumer staples to underweight.

Earnings revisions have been hurting the sector, which has been “leading the S&P on the downside,” Martin Adams said.

The reason? “Disposable income growth, at 2.4% year over year, is growing at its slowest pace in nearly 50 years, outside of the 2008-'09 recession,” she said.

The bearish analyst and institutional equity strategist also points out that the consumer-staples sector is down about 2.5% in the past three months.

“The bear case for staples and the [S&P] index at large is the earnings environment,” she said; earnings growth is at a 5%-6% pace for the third quarter but could slow down in the fourth.

“We are still pretty cautious, because we think ultimately stocks follow earnings growth, though they’ve decoupled a bit recently,” Martin Adams said.

Consumer-Focused ETFs

The Consumer Staples Select Sector SPDR (XLP) and the iShares S&P Global Staples ETF (KXI) both trail the S&P 500 year to date. They are up about 16% and 12.5%, respectively, while the index has jumped about 19% so far in 2013.  

For the past three months, the S&P has improved 1%, while XLP is down about 2%; the KZI has fallen about 0.3%. Both ETFs are trailing the S&P for the past month of trading.

The First Trust Consumer Staples AlphaDEX Fund (FXG), however, is bucking these trends. It’s ticked up a whopping 32% this year, 4% in the past three months and is ahead of the S&P for the last 30 days of trading (1.3% vs. 0.8%).

While FXG has large holdings of Herbalife (HLF), Safeway (SWY), Kroger (KR) and Constellation Brands (STZ), XLP and KXI have Procter & Gamble (PG) and Coca-Cola (KO) as top holdings, along with Philip Morris (PM).

The divergence in performance shows just how selective investors need to be in their sector picks given the current market and economic volatility.

Moreover, both in the short and longer term, Martin Adams’ concerns reflect growing economic and wealth inequality and the factors weighing on wages in Middle America that will impact the consumer-staples sector (and others) in the future. “It looks like pressure is on the consumer through the end of the year,” the Wells Fargo analyst said, “so we are moving away from staples.”

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Check out International Stocks Win, Munis Lose in September: Morningstar on ThinkAdvisor.

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