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Part 5: Will Fed taper slow Exxon’s long-term outperformance of the S&P 500?

Marc Wiersum, MBA

Series 7-C—Will the Fed take a bite out of Apple? (Part 5 of 6)

(Continued from Part 4)

Exxon–avoiding the lows

The below graph reflects the strong performance Exxon Mobile has had versus both the Morningstar large cap value total return index and the S&P 500 since 1999. However, since 2013, Exxon is up only about 10.0% while the S&P is up closer to 27.0%. This long term outperformance reflects the fact that Exxon, as a large cap value stock, held up much better than the overall market during the 2008-2009 market sell-off, while growth stocks with higher multiples were hit much harder–though also rallied much harder than Exxon post-2009. This article considers the outlook for Exxon Mobile, XOM, in light of the Fed’s tapering program.

Will rates hit Exxon?

Though a rising rate environment could impact the market overall, it is likely that more defensive stocks, like Exxon, XOM, will fare much better than high flying growth stocks, and even value stocks that have seen exceptional positive momentum since 2009. The fact that Exxon has a forward dividend yield of 2.60% may also keep long-term investors in place, despite interest rate worries. For large cap growth shares like Exxon, as well as its high flying, growth-oriented energy peer, Kinder Morgan, KMP, the biggest concern is the impact rising rates could have on different sectors of the market.  The million dollar question is—what is going to happen to interest rates when as the Fed withdraws its bond purchases, and what does that mean for equity valuations?  In other words, has the bear market in bonds begun, or will deflation contain the bear market in bonds? However, given Exxon’s modest performance since 2009 and modest price earnings ratio of around 13 times relative to the S&P 500 multiple of closer to 20 times earnings, Exxon’s stock price should be in a fairly solid defensive position going forward. High flying growth stocks are more likely to see short-term revaluations in the case of an interest rate spike.

To see how growth-oriented Kinder Morgan has fared relative to the large cap growth index and S&P 500, please see the next article.

Equity Outlook: constructive macro view

Despite problems in the Ukraine and China, and despite the modest consumption data in the USA, US labor markets appear to be well into recovery—with the exception of the long term unemployed. From this perspective, it would appear that the US is probably the most attractive major investment market at the moment. While the fixed investment environment of the US is still quite poor, corporate profits and household net worth have hit record levels. Hopefully, all of this wealth and liquidity can find their way into a new wave of profitable investment opportunities, and significantly augment the improvement in the current economic recovery. For investors who see a virtuous cycle of employment, consumption and investment in the works, the continued out performance of growth stocks over value stocks could remain the prevailing trend, favoring iShares Russell 1000 Growth Index (IWF), and growth oriented companies such as Google, GOOG, or Apple, AAPL.

Equity Outlook: cautious macro view

Given the China and Russia-related uncertainties, investors may wish to consider limiting excessive exposure to broad equity markets, as reflected in the iShares Russell 2000 Index, IWM, State Street Global Advisors S&P 500 SPDR and Dow Jones SPDRs—SPY & DIA, and iShares S&P 500, IVV. Accordingly, investors may wish to consider shifting equity exposure to more defensive consumer staples-related shares, as reflected in the iShares Russell 1000 Value Index, IWD, such as Wallmart, WMT.

Continue to Part 6

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