As the U.S. consumer begins to show signs of life and the nation continues to seek a resolution on health-care reform, analysts are betting the technology, consumer and medical sectors will be ones to watch in the fourth quarter.
The upcoming quarter is bound to look better on a year-over-year basis, as it was the fourth quarter last year when the financial meltdown really began to unfold, said Art Hogan, managing director at Jefferies & Co. Among the pool of stocks likely to outperform the market in the fourth quarter is the tech group, he said.
“The outlook for tech is as bright as it’s been in awhile. In a slow-growth economy, one thing that can increase productivity is new technology,” he said.
Hogan said the recent news about the planned acquisition of Perot Systems (PER) by Dell (DELL) is a preview of what’s to come during the fourth quarter, arguing that the tech sector is likely to see a “great deal” of consolidation during the period.
While many analysts agree technology’s big gains will continue through the fourth quarter, some are skeptical about the year to come. Peter Kenny, managing director at Knight Capital Group, who believes software stocks will do particularly well during the fourth quarter as a direct play on the global upgrade in tech, said the sector is doomed to see darker days as the Federal Reserve begins raising interest rates.
“We’re going through a phase where the rubber is really going to have to start hitting the road here,” Kenny said, arguing that the Federal Reserve will soon be forced to choke off inflation -- a move likely to negatively impact consumers and hinder the economic recovery.
But Kenny said the tech sector is still in for a great fourth quarter.
“We’ve got another quarter of slack before we start engaging in that process of raising interest rates,” he said.
Paul Nolte, director of investments at Hinsdale Associates, said he is already seeing some signs of underperformance in the technology group and expects the “big winner” of 2009 to fall behind in coming months.
Also on analysts’ radar for the fourth quarter are the consumer and retail sectors.
Hogan of Jefferies & Co. sees promise in the specialty apparel market, citing an uptick in mall traffic and the summer sales performance of companies such as American Eagle Outfitters (AEO), Gap (GPS) and Abercrombie & Fitch (ANF). Retail sales as a whole rose by a better-than-expected 2.7% in August -- the largest gain in three-and-a-half years, according to the Commerce Department. While the gain was due primarily to the government’s Cash for Clunkers auto incentive, apparel and accessory stores sales saw an adjusted gain of 2.4%.
Others are less optimistic about the holiday shopping season. Nolte of Hinsdale Associates estimates the Fall market decline may get postponed until November or December and fears it may make for a “tough” holiday season.
“Consumers are going to spend on Christmas, but nowhere near [the levels] where some of the expectations are,” he said.
Nolte said that if the markets do correct, the most defensive sectors and laggards of this year -- consumer stocks like those in the food and beverage space -- will outperform next year.
Perhaps one of the biggest issues hovering over the markets’ transition to the fourth quarter is the yet-unanswered question about the future of the health-care system. Aware of the impact a decision on health-care reform might have on HMOs and companies in the pharmaceutical sector, Nolte said he is focused on medical-device companies like Baxter (BAX), Zimmer Holdings (ZMH) and Medtronic (MDT).
Kenny of Knight Capital said increased pressure on big pharmaceutical companies will allow generic drug manufacturers to benefit, and also sees promise in the health-care information technology space.
Analysts said investors should be wary of the financial sector in the fourth quarter, because those stocks have bounced off their bankruptcy-fear lows but are still awaiting clarity on the Obama Administration’s plans for regulatory reform, analysts said.
Another area to be wary of is media, which is set to suffer in the short-term as print-based businesses struggle to find their digital footing, Kenny said.
“Media has an enormous transition to go through,” he said. “We’re going from paper to circuit boards, and I think there’s still a lot of pain in that process.”
Stocks End Mixed; Microsoft PlungesExperts point out where good buys might be
