Economic & Market Report: S&P’s Eleven

May 6, 2024
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By: Nexa Financial Group

A passing glance at the U.S. market might make an investor think that it’s all about technology stocks all of the time.  But the S&P 500 Index is made up of eleven sectors, all with their unique and individual forces driving their returns.  While the financial media attention is so heavily focused on a select few names, it is worthwhile to consider how these eleven sectors move in conjunction and contrast with each other over time in creating the more diversified symphony of market returns.

Information Technology. The tech sector is the Danny Ocean of the S&P 500.  It’s the sector that seemingly always gets the top billing in the financial media, and it has so many of the names that draw the attention of investors.  And over the last seven years, the spotlight has certainly been justified, with cumulative returns more than double that of the broader U.S. stock market.  And since the end of October when the latest stock market rally got underway, it continued to not disappoint with returns north of +22% over this time period.

Despite all of the glowing reviews, the tech sector has revealed some of its weaknesses as of late.  First, it has underperformed the broader S&P 500 by nearly a percentage point during this latest rally over the last six months.  Perhaps more notably, since March 13 nearly two months ago, tech has fallen by more than -6.5% versus the S&P 500 being only down -2%.

So while tech continues to be the headline stealing sector within the U.S. stock market, it is far from invincible.  To this point, it is worth remembering that tech was among the worst performing sectors during the 2022 bear market, and we can still recall the notorious bursting of the technology bubble only two decades ago.

Communication Services. This sector is the Rusty Ryan of the S&P 500.  It is tech adjacent, with many of its largest members having been transported from the tech sector a few years ago along with a basket of media companies.  And unlike tech, the communication services sector has outperformed the S&P 500 by more than +2% during the rally over the past six months.

But much like tech, it has also been a recent laggard for an even longer stretch.  Since February 2, communication services stocks have traded lower by -0.50% versus the S&P 500 trading higher by more than +2%.

Consumer Discretionary. If a third sector stood at the top of the popularity pack with tech and communication services, it would be consumer discretionary.  Thanks to its tech adjacent constituents Amazon and Tesla that together make up 40% of the sector’s entire market cap.  But despite all of the shining lights, the sector has been a notable laggard during the current rally.  It is higher by only +18%, falling more than five percentage points short of the S&P 500 since late October.  And since December 20, it is lower by -2.4% versus the broader market trading higher by nearly +7%.  This trailing performance is primarily attributable to Tesla, which has fallen by nearly -30% over this short time period.

So despite the robust historical performance and all of the ongoing fawning attention in the financial media, these three stock sector kings have been flat to negative for the last few months now.  Who then among the eleven is picking up the slack?

Financials.  It may come as a surprise to many market followers, but the best performing sector in the U.S. stock market by far is the Saul Bloom in financials.  On the brink of Great Financial Crisis II just over a year ago, the financials sector has rallied by nearly +30% since late October to outperform the broader S&P 500 by more than six percentage points.  But much like the headliners discussed above, so much of this upside was concentrated at the very beginning of the rally.  For since December 28 of last year, financials have risen just +8% mostly in line with the broader market.

Industrials.  The second best sector performer since late October has been the industrials sector with a +27.5% return.  It should be noted that of the eleven stock market sectors, industrials are the most highly correlated and historically have tracked most closely to the broader S&P 500.  And the recent rally has been no exception, as both industrials and the S&P 500 have largely moved in lockstep.  The relative outperformance has been a recent and fleeting development, as a strong relative surge from late February through mid-March propelled the sector higher, and it has managed to hold this ground in the weeks since.

These are the headliners and the leaders of the pack.  But with so many other sectors in the eleven, what of the so many co-stars and side characters that have underperformed the S&P 500 since late October?

The following are the remaining six sectors and their returns during the rally since late October:

Materials: +19.5%

Utilities: +17.6%

Real Estate: +15.5%

Consumer Staples: +15.3%

Health Care: +15.0%

Energy: +11.3%

Six sectors, all relative underperformers, but each with their own characteristics and relative return story.

Consider materials, which has outperformed the more glamorous consumer discretionary sector overall.  Yes, it has trailed the S&P 500 by more than four percentage points during the current rally, but since February 6 it has gained nearly +10% versus the broader market up by less than +3%.  Trailed early, but has been a recently stellar performer when those sectors above the title have been flagging.

How about utilities?  The most steady and understated sector among the group, it’s performance since early February has been more stellar than materials, registering a +12% advance since February 13 stretching well beyond the +1% S&P 500 return over this same time period.  Another recent leader as the headliners falter.

Energy is yet another.  The anti-tech sector – in years where tech ranks toward the middle to bottom of the sector table, energy is often found at the top and vice versa – has been the stellar performer in recent months despite still ranking at the bottom of the pack since late October.  Since January 18, the energy sector has rallied more than +16% versus just +7% for the broader market over this same time period.

The same can be said for the consumer staples sector as of late.  Despite relatively lackluster performance overall during the current rally, it has jumped nearly +4% since April 16 at a time when the broader S&P 500 has been flat.

Bottom line. All of this highlights key points about how we think about stock investing.  While tech, communications services, and consumer discretionary names continue to dominate the headlines and conversations about investment markets, it has been many of the afterthought sectors that have quietly assumed market leadership roles in recent months in working to continue moving the broader stock market to the upside.

This highlights why broad sector diversification remains important within equity strategies in working to lower portfolio risk and achieve more consistent overall returns over time.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice.  All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  Please consult a tax or legal professional for specific information and advice.

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