2011 was an eventful year for the American economy, and it seems to be slowly getting back on track. The last few weeks of 2011 started seeing some positive activity in consumer spending. Banking is slowly recovering, as is the demand for cars. Employment opportunities have improved with unemployment down to 8.5%. However, it was a recession-hit year for the economy, with greater focus on creating higher consumption through greater government spending.
SEE: Consumer Spending As A Market Indicator
According to the Chief Financial Officer of Washington DC, Natwar Gandhi, "There is no consumer demand as we speak. The businesses are not investing, as they do not see any demand out there. So the only player who can really generate demand is government. The government needs to spend money. There is a need to spend money on our infrastructure, which is abysmal. Unless government spends money to generate demand, I see very likely a lost decade, the kind that the Japanese have experienced over the last 10 years."
Let's take a look at the industries that performed the best and the worst in the year 2011. We will keep the Standard and Poor's (S&P) index as the benchmark to understand the American economy better. This index covers about 500 large cap American companies, and is considered to be a good indicator of the American economy. Our analysis is based on the Select Sector SPDRs, which are ETFs that divide the S&P 500 into nine sector index funds. The following table provides a snapshot of how each of the industry funds performed during the year 2011.
Total Returns (Net Asset Value) as of Dec. 31, 2011
|SPDR Fund Select Sector Year 2011|
The Biggest Rises
As you can see, the four industries that significantly outperformed the S&P500 index are: utilities, consumer staples, healthcare, and consumer discretionary. (For additional reading, check out Is Your Portfolio Beating Its Benchmark?)
Let's take a brief look at each of these industries.
Utilities: These are the companies that produce, generate, transmit or distribute electricity or natural gas. Utilities sector was the star performer in 2011. The key factor driving growth in this sector is the increased demand of electricity. The utility stocks offer relative safety and stability, and this could have been the reason behind investor attraction, due to the global financial crisis and European debt woes.
Consumer Staples: This sector includes companies that are primarily involved in consumer products, food and beverages, retail drugs, fast moving consumer goods, household products and personal care. The Consumer Staples Select Sector SPDR Fund showed a 14% increase in the year 2011. This sector has a demand that is non-cyclical. The growth has been consistent, even though the year saw high fuel volatility, which pushed up the prices of food. (To learn more, read Cyclical Versus Non-Cyclical Stocks.)
Healthcare: This sector includes companies making healthcare equipment and supplies, healthcare providers and services, biotechnology and pharmaceuticals industries. Expenditure on healthcare is expected to reach 31% of GDP by 2035, according to the Congressional Budget Office. About 17% of the population is still uninsured; this is expected to come down to 5% if the government goes ahead with its proposed plans for healthcare. According to PricewaterhouseCoopers, the key drivers for growth in the healthcare sector have been consolidation of providers, increased demand for healthcare due to stress related-diseases and cost shifting from Medicare and Medi-aid.
Consumer Discretionary: This includes automobiles, consumer durables, apparel, hotels, media and retail industries. Renewed consumer confidence in the U.S. auto sector has seen it on a resurgent mode. U.S. light-vehicle deliveries climbed 10%, or about 1.19 million, to 12.8 million in 2011. It is expected to grow further in 2012. The stocks in the consumer discretionary sector have performed better than high investment sectors like construction. This sector does have some cyclical nature, but lowering unemployment rates mean the outlook for 2012 is also positive.
The Biggest Falls
The two industries that did worst in 2011 were: Financial and Materials.
Financials: This was the worst performing sector in 2011. The Financials Select Sector SPDR Fund dropped by as much as 17% during the year. In addition to the slowing economy, Basel III's stricter capital adequacy norms, stricter government regulations and high default by consumers all further put pressure on the financial sector. This was further compounded by the problems in Europe.
Materials: This sector includes companies in chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products. The sector saw a dip, as there was little to no demand for housing and infrastructure. Sluggish demand and increased cost of materials saw this sector facing a low. Global outlook of demand for materials is currently on the downside.
The Bottom Line
The other sectors - technology, industrials, and energy - showed little or no growth. All in all it was a lackluster year for the U.S. economy. The last quarter of 2011 saw demand slowly rising and unemployment levels falling, and the government is planning to invest in the system. The growth prediction for 2012 is 3%, slightly better than 0.9% growth of the first two quarters of 2011. Clearly, the improvements are coming in a trickle, but they are improvements nevertheless. (For more information on individual sectors, read The Industry Handbook.)