Yardeni Stock Market Cycle

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hDeutsche Banc Alex. Brown

Deutsche Bank

US

Strategy

December 10, 2001

Dr. Edward Yardeni

Chief Investment Strategist

(+1) 212 469 [email protected]

Amalia F. Quintana

Equity Strategy Analyst

(+1) 212 469 [email protected]

Stock Market CyclesGlobal Strategist’s Handbook

Bottom

Fishing

Deutsche Banc Alex. Brown Global Strategist’s Handbook / December 10, 2001 / Page 1

- Introduction - Buy Low. During bear markets, stock investors and investment strategists are constantly on the lookout for the bottom. This time is no different. Indeed, many of them thought they caught it at the beginning of April this year. They were wrong. Picking the exact bottom can be very rewarding, of course. Since 1960, there have been nine major troughs in the S&P 500, following declines of 15% or more and averaging minus 24%. After these cyclical lows in stock prices, the average 6-month gain was an impressive 23% (Exhibit 1). In this special issue of the Global Strategist’s Handbook, I present numerous charts relating key economic and financial indicators to the cycle in stock prices with the focus on finding the ones that are most useful in picking bottoms. My conclusion is that many of the ones that have worked best in the past are currently suggesting that the panic-selling low of September 21 was probably “the” bottom for this cycle. There are no guarantees: Past performance does not indicate future results, as we say in the investment business. The low might be retested. A lower low might still be in the cards. Moreover, even if it was the bottom, the rebound in stock prices over the next 12 months may be well below the average, in my judgment, because stocks are not as undervalued as they were at previous bottoms. Timing Tools. One of the best times to buy stocks is during crises, when panic selling occurs. The crises usually trigger corrective policy responses, which prove the doomsayers wrong. So they present great buying opportunities for bargain hunters (Exhibit 2). Of course, this is easier said than done. For example, during the first week that the stock market was open for trading after the terrorist attacks, the right time to buy was on Friday, not Monday. By the end of the following week, most of the bargains were gone. Exhibits 3-32 show many of the best market timing tools, including a few that are not as useful as widely believed: 1) Momentum: Major market bottoms usually occur when the S&P 500 is more than 5% below its 200-day moving average. Drops exceeding 10% of this average have always made bottoms, i.e., four times in the past. On September 21, the Dow was 21.2% below its 200-day moving average. On a year-over-year percent change basis, declines of 15% or more in the S&P 500 have always marked the bottoms. The market was down 8.9% in November from a year ago. 2) Valuation: Historically, over the period examined in this report, major stock market bottoms often coincided with cyclical troughs in the price-to-earnings (p/e) ratio. This time, the p/e based on four-quarter trailing earnings was at an all-time high of 33.5 during the second quarter. Based on 52-week forward consensus expected earnings for the S&P 500, the p/e is currently 20, down from the record 25 in early 1999, but still relatively high. I don’t believe this rules out a September bottom, but I do think it limits the upside return over the next 12 months compared to the historical average. This is because some

Page 2 / December 10, 2001 / Deutsche Banc Alex. Brown Global Strategist’s Handbook

of the historical 12-month average return was attributable to the rebound in the p/e from its cyclical lows (Exhibit 5). Another useful valuation tool, the Fed’s Stock Valuation Model, shows that stocks were undervalued during each of the previous four market bottoms. They appear to have been undervalued again in September, according to the model (Exhibit 6). 3) Interest Rates. Stock market bottoms usually occur after the Fed has started to ease monetary policy. They have occurred between zero and 40 months after the peak in the federal funds rate, with an average of 12 months during the previous seven easing cycles. This time, the Fed cut the federal funds rate ten times over the first ten months of 2001 and only now are there mounting signs of a significant bottom for stock prices (Exhibit 7). The 10-year Treasury bond yield has a better record as a timing tool having peaked almost exactly at the same time as stocks troughed on six occasions. However, these are now deflationary times, and the trough in stock prices is more likely to coincide with the upturn in bond yields as happened in 1998 (Exhibit 8). Other useful interest rate tools are yield curve spreads and credit-quality corporate bond yield spreads. The federal funds rate dropped below the 10-year Treasury yield at the start of the year, usually a necessary condition for a stock market bottom (Exhibit 9). The spread between A-rated corporate bond yields and the 10-year Treasury usually spikes up to a cyclical peak just as stock prices start to rebound (Exhibit 10). 4) Earnings. In the past, stock prices started to recover three to 15 months before the bottom in reported earnings, on a four-quarter trailing basis. There is less of a lead time relative to 52-week forward consensus expected earnings, which started to bottom during the summer. But now, after the terrorist attacks, the bottom for earnings is likely to occur at the beginning of next year (Exhibit 11). This outlook is confirmed by my Weekly Profits Proxy—i.e., Business Week’s industrial production index multiplied by the CRB raw industrials spot price index. It has been falling steeply since the attacks (Exhibit 12). 5) Economic Indicators. Stock prices tend to trough before production indicators do so. The lead time has been three to nine months for industrial production (Exhibit 13). A tighter relationship is with the National Association of Purchasing Management’s (NAPM) Production Index. It is a diffusion index and has almost always bottomed at the same time or very shortly after stock prices did so (Exhibit 14). An even better coincident indicator of stock market bottoms is a composite NAPM index of “nominal” activity that I construct by adding the association’s production and pricing indexes and dividing by two. It should bottom before the end of the year, in my opinion (Exhibits 15 and 16). I also like to track the yearly percent change in industrial commodity prices (Exhibit 17). Sustained stock market rebounds and rallies rarely happen when these prices are falling (Exhibit 18). Stock market bottoms often coincide with peaks in initial unemployment claims and our Boom-Bust Barometer (Exhibits 19 and 20). The “expectations” component of the Consumer Sentiment Index has a better track record of calling stock market bottoms than does the “present” component (Exhibits 21, 22, 23, 24, 25, and 26). Finally, there doesn’t seem to be any useful predictive relationship between key employment indicators and the stock market (Exhibits 27 and 28). There is


also very little correlation between the turning points in the monetary and stock market cycles (Exhibits 31 and 32). Sector Bets. Most institutional investors can’t raise a great deal of cash while waiting for the next crisis to create buying opportunities. Most tend to be always fully invested, so market timing may not be a very relevant exercise for them. Nevertheless, market timing can help boost performance by identifying sectors and industries that tend to either under perform or outperform during a cyclical recovery in stock prices. Exhibits 33-60 are designed to provide some insights for the selected industries where relative performance data are available for several years. 1) Basic Industries. Paper & Forest Products and Chemicals were underperformers during the late 1990s and are now starting to show some relative strength again. There have been a few instances where they outperformed before the trough in stock prices. They rarely do so after major stock market bottoms (Exhibits 33 and 34). Aluminum and Iron & Steel have been underachievers since the 1960s. In a few instances, Aluminum has outperformed before the trough in the S&P 500, but this rarely continues past the trough (Exhibits 35 and 36). Metals Mining shows the same historical pattern of often performing relatively well before, but not after, S&P 500 troughs (Exhibit 37). Containers & Packaging has occasionally outperformed for a brief period after major cyclical lows in stock prices (Exhibit 38). 2) Capital Goods stock prices tend to trough relative to the S&P 500 near market bottoms (Exhibit 39). Computers tend to outperform around stock market troughs. Currently, they are underperforming (Exhibit 40). 3) Consumers. In the past, Retail Department Stores often either were market performers or above-average performers following stock market troughs (Exhibit 41). The same can be said for Consumer Finance, though the record is more mixed for this industry (Exhibit 41). Autos have tended to outperform the market around S&P 500 troughs, though they are currently underperforming. Auto Parts lag Autos on the way down, but often lead on the way up (Exhibit 42). Entertainment was a very volatile outperformer during the 1970s and 1980s. It has been a volatile market performer since the early 1990s (Exhibit 43). Homebuilding stocks sometimes bottom when the market does (Exhibit 44). Beverages, Foods, and Personal Care tend to outperform going into market troughs and underperform coming out, though there have been exceptions to the rule (Exhibits 45-48). 4) Energy. International Integrated Oils tend to be very volatile market performers. The volatility is driven by oil prices. Relative to the S&P 500, Domestic Integrated Oils have been driven entirely by the trend in oil prices (Exhibits 49 and 50). There also isn’t much of a relationship between the stock market’s cycle and Oil & Gas Drilling & Equipment and Natural Gas Utilities (Exhibits 51 and 52). 5) Financials. Banks often underperform after stock market bottoms. They are outperforming currently because the yield curve is quite bullish for this industry (Exhibit


53). Property Casualty Insurance and Savings & Loan Companies tend to underperform after the trough in the S&P 500 (Exhibits 53 and 54). 6) Health Care , including Drugs and Medical Products & Supplies, often underperforms after S&P 500 troughs (Exhibits 55 and 56). 7) Transportation. Truckers and Railroads often outperform the market for several months after S&P 500 troughs (Exhibits 57 and 58). 8) Miscellaneous. Electric Utilities have been long-term underperformers. They tend to outperform for short periods prior to S&P 500 troughs (Exhibit 59). Gold & Precious Metals Mining has often spiked relative to the S&P 500 near stock market troughs (Exhibit 60).

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S&P 500 INDEX*(ratio scale)

12/7

T = S&P 500 major cyclical trough* Monthly through April 1994, weekly thereafter.

yardeni.com

#1The T-lines shown in all of the following charts designate the major cyclical troughs in the S&P 500 following declines of 15% or more from the previous cyclical peaks. There have been 10 such bear markets since 1960, with an average decline of 24% (including the current 37% drop). The average 6-month gain after the past nine troughs has been 23%.

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S&P 500 INDEX & CRISES(ratio scale)

1973OilEmbargo

1974FranklinNational

1962CubanMissileCrisis

1970PennCentral

1980SilverBubble

1982DrysdaleSecurities &Mexico Default

1984ContinentalIllinois

1987StockMarketCrash

1990PersianGulfCrisis

1990S&LCrisis

1994MexicanPesoCrisis

1997PacificRimCrisis

1998LTCM/RussianDefault Crisis

2001 WTCAttack

yardeni.com

#2

More often than not, major bottoms coincide with financial crises, which trigger panic selling. The crises, in turn, usually trigger corrective policy responses, which prove the doomsayers wrong. So they present great buying opportunities for bargain hunters.

- S&P 500 -


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S&P 500 INDEX(percent above/below 200-day moving average)

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T = S&P 500 major cyclical troughMonthly through 2000, weekly thereafter.

yardeni.com#3

Major market bottoms usually occur when the S&P 500 is more than 5% below its 200-day moving average. Drops exceeding 10% of this average have always made bottoms, i.e., four times in the past.

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S&P 500 INDEX(yearly percent change)

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T = S&P 500 major cyclical trough

yardeni.com

#4

On a year-over-year basis, declines of 15% or more in S&P 500 Index have always marked the bottoms.

- Momentum -


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FORWARD P/E RATIO FORS&P 500**

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TRAILING P/E RATIOFOR S&P 500*

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T = S&P 500 major cyclical trough * Using four-quarter trailing reported earnings.** Using 52-week forward consensus expected operating earnings per share (mid-month data). Monthly through April 1994, weekly thereafter.

yardeni.com

#5

Major stock market bottoms often coincide with cyclical troughs in the P/E ratio, i.e when stocks are relatively cheap.

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FED’S STOCK VALUATION MODEL*(percent)

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T = S&P 500 major cyclical trough* Ratio of S&P 500 Index to its Fair-Value (52-week forward consensus expected S&P 500 operating earnings per share divided by the 10-year US Treasury bond yield) minus 100. Monthly through April 1994, weekly thereafter. Source: Thomson Financial

yardeni.com

#6

The Fed’s Stock Valuation Model shows that stocks were undervalued during each of the bottoms since 1979.

- Valuation -


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FEDERAL FUNDS RATE*

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T = S&P 500 major cyclical trough* Monthly through 1986, 4-week average thereafter.

yardeni.com#7

Stock market bottoms usually occur after the Fed has started to ease monetary policy. Most recently, the Fed started easing in early January 2001 and it has taken longer to make a stock market bottom.

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10-YEAR TREASURY BOND YIELD*

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T = S&P 500 major cyclical trough* Monthly through 1986, 4-week average thereafter.

yardeni.com

#8

Stock market bottoms often coincide with cyclical peaks in the bond yield during inflationary times. During the more recent deflationary times, the trough in stock prices is more likely to coincide with the upturn in the bond yield as in 1998.

- Interest Rates -


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YIELD CURVE*

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T = S&P 500 major cyclical trough* 10-year Treasury yield less federal funds rate. Monthly through 1987, weekly thereafter.

yardeni.com

#9

The yield curve spread tends to cross from negative to positive territory at major stock market bottoms. The yield curve did so again most recently at the start of 2001.

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MOODY’S A-RATEDCORPORATE BOND YIELD*

LESS 10-YEARTREASURY BOND YIELD

Source: Moody’s Investors Service.

T = S&P 500 major cyclical trough. Monthly through 1986, weekly thereafter.* Based on nearly 100 seasonal bonds with remaining maturities of at least 20 years.

yardeni.com

#10

Stock prices tend to trough when credit-quality corporate bond yield spreads peak, as is likely to be the case again soon.

- Interest Rates -


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S&P 500 EARNINGS(ratio scale)

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Q2

Operating*

Reported**

T = S&P 500 major cyclical trough * 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through April 1994, weekly thereafter.** Four-quarter sum. Source: Thomson Financial

yardeni.com#11

In the past, stock prices started to recover 3 to 15 months before the bottom in reported earnings. There is less of a lead time relative to expected earnings.

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WEEKLY PROFITS PROXY*11/24

T = S&P 500 major cyclical trough* Business Week’s industrial production index multiplied by CRB raw industrials spot price index divided by 1000.

yardeni.com

#12

Stock prices often trough shortly before upturns in our Weekly Profits Proxy.

- Earnings -


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BUSINESS WEEKPRODUCTION INDEX

(ratio scale, four week moving average)

11/24

INDUSTRIAL PRODUCTION: MANUFACTURING(ratio scale, 1992=100)

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yardeni.com

#13

The S&P 500 is included in the Index of Leading Economic Indicators. Industrial production is a component of the Index of Coincident Indicators. The bottom in stock prices led the bottom in industrial production 5 times since 1960 with a lead time of 3 to 9 months.

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NAPM PRODUCTION INDEX

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yardeni.com

#14

Stock prices bottomed just before or at the same time as the NAPM Production Index did so 7 times since 1960.

- Production -


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NAPM COMPOSITE INDEX

Nov

Source: National Association of Purchasing Management.T = S&P 500 major cyclical trough

yardeni.com#15

The NAPM Composite Index has bottomed either at the same time or a few months after stock prices bottom 6 out of 9 times since 1960.

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(NAPM PRODUCTION PLUS NAPM PRICE)/2

Nov

T = S&P 500 major cyclical troughSource: National Association of Purchasing Management.

yardeni.com

#16

Since 1960, 9 out of 10 times, stock prices rebounded from their cyclical lows within a month or two of the bottom in this "nominal" NAPM composite index.

- NAPM Composite -


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CRB RAW INDUSTRIALS SPOT PRICE INDEX(1967=100, ratio scale)

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CRB FUTURES PRICE INDEX(1967=100, ratio scale)*

12/11


yardeni.com

#17

Stock market bottoms usually occur after commodity prices have peaked.

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CRB RAW INDUSTRIALS SPOT PRICE INDEX(yearly percent change)

12/4


yardeni.com

#18

Stock prices usually recover when industrial commodity prices are rising on a year-over-year basis. Currently they are falling.

- Commodity Prices -


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INITIAL UNEMPLOYMENT CLAIMS(four-week m.a., thousands, s.a)

12/1


yardeni.com#19

Stock market bottoms often coincide with peaks in initial unemployment claims and troughs in our Boom/Bust Barometer.

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BOOM BUST BAROMETER*

12/1

T = S&P 500 major cyclical trough* CRB raw industrials spot price index divided by initial unemployment claims.

yardeni.com

#20#20

- Boom-Bust Barometer -


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CONSUMER SENTIMENT INDEX: PRESENT*

Dec

T = S&P 500 major cyclical trough* Quarterly through 1978, monthly therafter. Source: Survey Research Center, University of Michigan.

yardeni.com

#21

The "expectations" component of the Consumer Sentiment Index has a better track record of calling stock market bottoms than does the "present" component.

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CONSUMER SENTIMENT INDEX: EXPECTATIONS*

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T = S&P 500 major cyclical trough* Quarterly through 1978, monthly therafter. Source: Survey Research Center, University of Michigan.

yardeni.com

#22#22

- Consumer Sentiment -


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NEWS HEARD OF RECENT CHANGES IN BUSINESS CONDITIONS*

Dec

T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter.* Favorable minus unfavorable plus 100. Source: Survey Research Center, University of Michigan.

yardeni.com#23

Stock market bottoms usually occur when the news background is the worst, and when consumers are most negative about the year ahead outlook for business.

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EXPECTED CHANGE IN BUSINESS CONDITIONS IN A YEAR*(dash line)

Dec

CURRENT BUSINESS CONDITIONS VERSUS A YEAR AGO*(solid line)

Dec

T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter.* Better minus worse plus 100 Source: Survey Research Center, University of Michigan.

yardeni.com

#24#24



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BUSINESS CONDITIONS EXPECTED DURING THENEXT 12 MONTHS*

Dec

T = S&P 500 major cyclical trough. Quarterly through 1977, 3-month moving average thereafter.* Good minus bad plus 100 Source: Survey Research Center, University of Michigan.

yardeni.com

#25

Often, consumers’ assessment of the future is most pessimistic near market bottoms.

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BUSINESS CONDITIONS EXPECTED FOR THE NEXT 5 YEARS*

Dec

T = S&P 500 major cyclical trough. Quarterly through 19977, 3-month moving average thereafter.* Good minus bad plus 100 Source: Survey Research Center, University of Michigan.

yardeni.com

#26#26



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PAYROLL EMPLOYMENT(yearly percent change)

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yardeni.com#27

Stock market bottoms have coincided as often with the peak as with the trough in employment growth. The same mix applies to the jobless rate.

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CIVILIANUNEMPLOYMENT RATE

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yardeni.com

#28#28

- Employment -


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EMPLOYMENT RATE*(solid line, left scale)

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CAPACITY UTILIZATION: TOTAL(dash line, right scale)

Oct

T = S&P 500 major cyclical trough* 100 minus unemployment rate.

yardeni.com

#29

The Resource Utilization Rate tends to bottom a few months after the stock market does so.

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RESOURCE UTILIZATION RATE*(percent)

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* Average of all industries capacity utilization rate plus employment rate, i.e, percentage of labor force that is employed.


yardeni.com

#30#30

- Resource Utilization -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-5

0

5

10

15

20

-5

0

5

10

15

20

T T T T T T T T T ?

MONETARY BASE*(yearly percent change)

11/28


yardeni.com#31

Hard to see a useful correlation between monetary and stock price cycles.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06-5

0

5

10

15

20

-5

0

5

10

15

20

T T T T T T T T T ?

M3*(yearly percent change)

11/26


yardeni.com

#32#32

- Money -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.5

1.0

1.5

2.0

2.5

3.0

3.5

.5

1.0

1.5

2.0

2.5

3.0

3.5

T T T T T T T T T ?

PAPER & FOREST PRODUCTSRELATIVE TO S&P 500* 12/7


yardeni.com

#33

These two basic materials industries were underperformers during the late 1990s and are now starting to show some relative strength again. There have been a few instances where they outperformed before the trough in stock prices.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.2

.4

.6

.8

1.0

1.2

.2

.4

.6

.8

1.0

1.2

T T T T T T T T T ?

CHEMICALSRELATIVE TO S&P 500*

12/7


yardeni.com

#34#34

- Basic Materials -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

T T T T T T T T T ?

ALUMINUMRELATIVE TO S&P 500*

12/7

T = S&P 500 major cylical trough* Monthly through April 1994, weekly thereafter.

yardeni.com#35

These two basic materials industries have been underachievers since 1960s. In a few instances, Aluminum has outperformed before the trough in the S&P 500.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

T T T T T T T T T ?

IRON & STEELRELATIVE TO S&P 500*

12/7


yardeni.com

#36#36

- Basic Materials -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

.0

.2

.4

.6

.8

1.0

T T T T T T T T T ?

METALS MININGRELATIVE TO S&P 500*

12/7


yardeni.com

#37

Metals Mining industry is overdue for some relative gains.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 060

1

2

3

4

0

1

2

3

4

T T T T T T T T T ?

CONTAINERS & PACKAGINGRELATIVE TO S&P 500*

12/7


yardeni.com

#38

Containers and Packaging rebounding nicely after years of underperformance.

- Basic Materials -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.6

.7

.8

.9

1.0

1.1

1.2

.6

.7

.8

.9

1.0

1.1

1.2

T T T T T T T T T ?

CAPITAL GOODSRELATIVE TO S&P 500*

12/7


yardeni.com#39

Capital Goods tends to trough relative to S&P 500 near market troughs.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

T T T T T T T T T ?

COMPUTER (HARDWARE)RELATIVE TO S&P 500*

12/7


yardeni.com

#40

Computers tend to outperform around stock market troughs. Currently, they are underperforming.

- Capital Goods & Computers -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

T T T T T T T T T ?

RETAIL DEPARTMENT STORESRELATIVE TO S&P 500*

CONSUMER FINANCERELATIVE TO S&P 500*

12/7


yardeni.com

#41

Department Stores and Consumer Finance sometimes outperform S&P 500 during stock market rebounds from major troughs.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.00

.05

.10

.15

.20

.25

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

T T T T T T T T T ?

AUTOSRELATIVE TO S&P 500 INDEX

(left scale)*

AUTO PARTSRELATIVE TO S&P 500 INDEX

(right scale)*

12/7


yardeni.com

#42

Autos often outperform the market just before and just after market troughs. This is not happening now. Auto Parts lag Autos on the way down, but often lead on the way up.

- Consumer Cyclicals -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

T T T T T T T T T ?

ENTERTAINMENTRELATIVE TO S&P 500*

12/7


yardeni.com#43

Entertainment was a very volatile outperformer during the 1970s and 1980s. It has been a volatile market performer since early 1990s.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.1

.2

.3

.4

.5

.0

.1

.2

.3

.4

.5

T T T T T T T T T ?

HOMEBUILDINGRELATIVE TO S&P 500*

12/7


yardeni.com

#44

Not much correlation between Homebuilding stocks cycle and S&P 500 cycle.

- Consumer Cyclicals -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

T T T T T T T T T ?

BEVERAGES (ALCOHOLIC)RELATIVE TO S&P 500*

12/7


yardeni.com

#45

Beverages tend to outperform going into market troughs and underperform coming out.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 060

1

2

3

4

5

0

1

2

3

4

5

T T T T T T T T T ?

BEVERAGES (NON-ALCOHOLIC)RELATIVE TO S&P 500*

12/7


yardeni.com

#46#46

- Consumer Staples -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.4

.6

.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

T T T T T T T T T ?

FOODSRELATIVE TO S&P 500*

12/7


yardeni.com#47

Foods quickly regaining much of their relative strength that was lost in the late 1990s.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.2

.4

.6

.8

1.0

1.2

1.4

.2

.4

.6

.8

1.0

1.2

1.4

T T T T T T T T T ?

PERSONAL CARERELATIVE TO S&P 500*

12/7


yardeni.com

#48

Personal Care tends to outperform going into stock market troughs and underperform coming out.

- Consumer Staples -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.5

.6

.7

.8

.9

1.0

1.1

.5

.6

.7

.8

.9

1.0

1.1

T T T T T T T T T ?

OIL(INTERNATIONAL INTEGRATED)

RELATIVE TO S&P 500*

12/7


yardeni.com

#49

International Integrated Oil stocks tend to be volatile market performers. The volatility is driven by oil prices.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 060

1

2

3

4

0

1

2

3

4

T T T T T T T T T ?

OIL(DOMESTIC INTEGRATED)


12/7


yardeni.com

#50

Domestic Integrated Oil’s relative performance is driven entirely by trend in oil prices.

- Energy -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 060

5

10

15

20

25

0

5

10

15

20

25

T T T T T T T T T ?

OIL & GAS(DRILLING & EQUIPMENT)


12/7


yardeni.com#51

Not much of a relationship between these two industries and the stock market’s cycle.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.4

.6

.8

1.0

1.2

1.4

1.6

.4

.6

.8

1.0

1.2

1.4

1.6

T T T T T T T T T ?

NATURAL GASRELATIVE TO S&P 500*

12/7


yardeni.com

#52#52

- Energy -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

1.1

1.2

1.3

1.4

.0

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

1.1

1.2

1.3

1.4

T T T T T T T T T ?

MONEY CENTER BANKSRELATIVE TO S&P 500

(solid line)*

12/7

MAJOR REGIONAL BANKSRELATIVE TO S&P 500*

(dash line)

SAVINGS & LOAN COMPANIESRELATIVE TO S&P 500*

(dotted line)


yardeni.com

#53

Banks and thrifts tend to outperform before the stock market bottoms though a predictable pattern is hard to find.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.3

.4

.5

.6

.7

.8

.9

1.0

1.1

1.2

1.3

1.4

1.5

.3

.4

.5

.6

.7

.8

.9

1.0

1.1

1.2

1.3

1.4

1.5

T T T T T T T T T ?

INSURANCE (PROPERTY CASUALTY)RELATIVE TO S&P 500*

12/7


yardeni.com

#54

PC Insurance companies tend to be market performers.

- Financials -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

.0

.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

T T T T T T T T T ?

DRUGS-MAJOR PHARMACEUTICALS


12/7


yardeni.com#55

Health Care often underperforms after S&P 500 troughs.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.1

.2

.3

.4

.5

.6

.7

.8

.9

.0

.1

.2

.3

.4

.5

.6

.7

.8

.9

T T T T T T T T T ?

HEALTH CARE (MEDICAL PRODUCTS & SUPPLIES)RELATIVE TO S&P 500*

12/7


yardeni.com

#56#56

- Health Care -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

.0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

T T T T T T T T T ?

TRUCKERSRELATIVE TO S&P 500*

12/7


yardeni.com

#57

Truckers and Railroads often outperform the market for several months after S&P 500 troughs.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.2

.4

.6

.8

1.0

.2

.4

.6

.8

1.0

T T T T T T T T T ?

RAILROADSRELATIVE TO S&P 500*

12/7


yardeni.com

#58#58

- Transportation -


60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.2

.4

.6

.8

1.0

.0

.2

.4

.6

.8

1.0

T T T T T T T T T ?

ELECTRIC COMPANIESRELATIVE TO S&P 500*

12/7


yardeni.com#59

Electric Utilities have been long-term underperformers. They tend to outperform for short periods prior to S&P 500 troughs.

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06.0

.5

1.0

1.5

2.0

.0

.5

1.0

1.5

2.0

T T T T T T T T T ?

GOLD & PRECIOUSMETALS MINING


12/7


yardeni.com

#60

On a relative basis, Gold has often spiked up near S&P 500 troughs.

- Miscellaneous -


The information and opinions in this report were prepared by Deutsche Bank or one of its affiliates (collectively “Deutsche Bank”). This report is based uponinformation available to the public. The information herein is believed by Deutsche Bank to be reliable and has been obtained from sources believed to bereliable, but Deutsche Bank makes no representation as to the accuracy of completeness of such information. Deutsche Bank and/or its affiliates worldwidemay be market makers or specialists in, act as advisers or lenders to, have positions in and effect transactions in securities of companies mentioned hereinand also may provide, may have provided, or may seek to provide investment banking services for those companies. In addition, Deutsche Bank and/or itsaffiliates or their respective officers, directors and employees hold or may hold long or short positions in the securities, options thereon or other relatedfinancial products of companies discussed herein.Opinions, estimates and projections in this report constitute Deutsche Bank’s judgment and are subject to change without notice. Prices and availability offinancial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer tobuy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in whichsuch an offer or solicitation would violate applicable laws or regulations.The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions using theirown independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument isdenominated in a currency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derivedfrom, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price orvalue of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicativeof future results.Unless governing law permits otherwise, all transactions should be executed through the Deutsche Bank entity in the investor’s home jurisdiction. In the U.S.this report is approved and/or distributed by Deutsche Banc Alex. Brown Inc., a member of the NYSE, the NASD and SIPC. In the United Kingdom this reportis approved and/or distributed by Deutsche Bank AG, which is regulated by The Securities and Futures Authority (the “SFA”), is not for distribution to privatecustomers (as that term is defined under the rules of the SFA) and no financial instruments referred to herein will be made available to any such privatecustomer. In jurisdictions other than the U.S. and the U.K. this report is distributed by the Deutsche Bank affiliate in the investor’s jurisdiction, and interestedparties are advised to contact the Deutsche Bank office with which they currently deal. Additional information relative to securities, other financial productsor issuers discussed in this report is available upon request.

No part of this material may be copied or duplicated in any form or by any means, or redistributed, without Deutsche Bank’s prior written consent.

Copyright 2001 Deutsche Banc Alex. Brown Inc., all rights reserved. 2001USA00000

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Yardeni Stock Market Cycle