Almost There: S&P 500 Gains, Still Down in 2014

Earlier today, the S&P 500 looked like it would close at an all-time high. Then the bears roared, and S&P 500 gave back about half its gains despite big moves in United Health (UNH), Humana (HUM), Pioneer Natural Resources (PXD), ExxonMobil (XOM) and  Regeneron (REGN).

Yoshikazu Tsuno/Agence France-Presse/Getty Images

The Dow Jones Industrial Average rose 103.84 points, or 0.6%, to 16,207.14 today, while the S&P 500 Index 0.6% today to 1,847.6. The S&P 500 is down 0.04% this year.

United Health rose 3% to $76.01 and Humana gained 11% to after Medicare payment cuts were less severe than expected. Pioneer Natural Resources jumped 4.1% to $194.74 and ExxonMobil rose 1.5% to $96.44 as the price of oil stayed above $100 a barrel for the eighth consecutive day. Regeneron finished up 3.8% at $347.62 after the FDA said it would review Eylea. Wells Fargo’s Gary Thayer notes that “investors still appear to be cautious.” He explains:

Looking ahead, we believed that cyclical stocks will outperform defensive stocks again later this year if our long-term positive outlook on the U.S. economy and the U.S. stock market is correct. However, the recent better performance of defensive stocks suggests that investors are still cautious even though several U.S. stock market indexes are near record highs again.

The exception to the strong defensive performance: consumer staples. The Consumer Staples Select Sector SPDR (XLP) has dropped 2.9% this year, making it the worst-performing sector in the S&P 500. Barclays’ Barry Knappexplains what’s gone wrong:

Consumer Staples is the worst performing sector year to date, acting less than defensive even during the ~5% recent correction in the S&P and a rally in 10y rates. We upgraded the sector in early December 2913, in anticipation of an equities sell-off in 1H14, but also looking to avoid exposure to rising rates—Staples are by far the least rate sensitive of the
four defensive sectors—and to take advantage of significantly cheaper valuations. We expected a Fed-related correction to spill over into emerging markets, but expected much of the currency impacts to be translation. However, the severity and speed of the drops in emerging-market currencies has had transaction effects as companies can't raise prices fast enough to offset the drop in currency or were unable to hedge in certain markets. But the other idiosyncratic factors have severely hampered performance. As we look at the stocks now, earnings season significantly discounted these concerns and the sector screens all the more attractive on valuations, with compelling dividend yields.

Sometimes, even being defensive can backfire.