A graph from the May 2008 issue of Harvard Business Review tells a story about the dumbing down of the global economy.

From an article, Rebuilding the R&D Engine in Big Pharma [subscription required] the graph shows the total shareholder returns for various industries in two time periods: from 1985 to 2000 and from 2001 to 2007. Here are three of the leading sectors from 1985 to 2000 (average annual shareholder returns are in parentheses):

• Pharmaceuticals (20.0%)
• Financials (18.8%)
• IT (17.4%)

Between 2001 and 2007, three of the leading sectors were:

• Energy (15.2%)
• Materials (14.3%)
• Financials (7.0%)

Investors frequently like to chase "hot stocks." While not based on fundamentals, momentum investing does sometimes work as stocks that are "working today" frequently "work tomorrow" as well.

So, as 2008 is 1/6th done, it's time to look back at the highfliers from 2007 and see where they're trading today. As usual, the analysts at Bespoke Investment Group have some good data and charts for us.

In a post, titled "How the Best Have Done," Bespoke analyzes the best performing U.S. stocks of 2007 and tracks them into 2008. The results:

• First Solar Inc. (NASDAQ: FSLR), 2007's best performer, is down 21.86% year to date. See BloggingStock's Aaron Katsman's article on why he shorted this stock into the New Year.
  
• The second best, Onyx Pharma Inc. (NASDAQ: ONXX), is down 49.51%.

While some solar stocks are down big in 2008 after a huge run-up in 2007, the big winners are heavily concentrated in materials, agriculture, and energy. BPZ Resources Inc. (AMEX: BZP) is the stock on the list that has done the best in 2008 -- rising another 44% so far this year.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

By most accounts, last Friday's discount rate cut by the Federal Reserve was intended to benefit the beleaguered credit markets, and by extension, lenders and other financial institutions that have suffered as a result of the current upheaval.

Given that, it is interesting that the biggest beneficiaries in performance terms since Thursday's close have been the materials, energy, and industrials sectors.

Some might say that means equity investors interpreted Friday's action as a routine step towards eventual monetary policy easing -- rather than an abrupt policy reversal to address a quickening credit crisis.

More cynically, it may have been seen as just another opportunity to re-enter or add to positions that have been in vogue among the leveraged speculation crowd for quite a while now.

With U.S. long-term interest rates trending higher, a question equity investors might be asking themselves is which stocks and sectors could be affected most?

One way of analyzing the problem is to look at the historical correlation (derived from rolling 36-month windows) between monthly S&P 500 index sector returns and changes in 10-year U.S. Treasury yields.

Roughly speaking, correlation measures the degree to which two sets of data points track one another. When they are positively correlated, respective changes for each period tend to have the same sign (i.e., plus or minus); when they are negatively correlated, the opposite holds true. The higher the value in absolute terms, the tighter the connection.

Up until the spring of 2003, it would have been difficult to arrive at a clear-cut answer, as the various sector-yield correlations were somewhat in synch.

Since then, however, correlations have diverged somewhat, with the utility and materials groups (which have equivalent exchange-traded funds, or ETFs (AMEX: XLU and XLB, respectively)) currently at opposite ends of a widening spectrum. That is, when yields have been rising, there has been a modest downward bias in monthly utility sector returns and a modest upward bias in materials sector returns.

Under the circumstances, a further increase in long-term interest rates (i.e., continued falling bond prices) could see the utility sector, which has already been slammed in recent weeks, under further pressure, while materials shares may offer a degree of refuge. Of course, one should always bear in mind that interest rates are not the only influence on stock prices.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.