Stock Market Sector Winners And Losers Have A Story To Tell

One of the many things I find fascinating about the stock market is how if you listen carefully, it tells you a story. At times that is a story of encouragement when despair is everywhere. Other times, it screams at you to keep your perspective and not get greedy. I think that latter message is what the market is whispering now. And with geopolitical and economic events galore hitting the news stand the next couple of months, it’s a good time to take account of what the market may be telling us.

Adobe Stock

To do so, I simply looked at market sector performance in the U.S. over the 12 months ended 9/1/17. In 2015 and 2016, this was around the time of year when there was a major shift within the market’s sectors. In 2015, a rough summer for more value-oriented and higher dividend stocks quickly gave way to a reversal in fortune, as those stocks became market leaders for the next 12 months. Then, around this time last year, the reversal…reversed, and growth oriented sectors once again dominated the performance charts.

As I often say in this space, it is important to view the market through the prism that is your own unique objectives, not what I or any other market commentator believes. What I do hope to impart to you is that the market, like any professional athlete, is prone to streaks, both winning and losing, versus its peers. And rather than getting caught up in what is working now, you are better off determining what your investment belief system is, and letting that be your guide. That will force you to put up with periods of under-performance, and it is precisely at times like that where you will be tested to see if your investment discipline is based on principles, or based on the direction the wind is currently blowing. Wall Street is one big herd, and it is easy to get caught up in the fervor. In recent history, that would have had you chasing some sectors in the autumn of 2015 and a completely different set of sectors at the same time in 2016.

Now, there are “sector-rotators” in the investment business, and I imagine that some of them have distinguished track records. But that is a tough way to try to pursue or maintain a retirement nest egg.

The table below shows a group of sectors (represented by ETFs that track them) which together make up a large portion of the large cap U.S. stock market. The past 12 months have defined clear winners and losers that are not surprising, given that the Nasdaq 100 Index rose more than 26% during this 12-month time frame, which was the key to lifting the SP 500 by over 16%. Biotech and Technology are natural winners in such an environment, and financial and metals and mining stocks supported that move higher. Biotech also lifted the broader healthcare sector in the midst of that group becoming a political football. Consumer Discretionary stocks as a group did well, though I will note that this sector index was heavily influenced by one stock, whose name was taken from a large river in South America (did you guess it?).

YCharts 2017

The weaker sectors for the past 12 months include some which I have written about quite a bit lately.  The Real Estate, Telecommunications and Energy sectors have been decided laggards, and the Energy Exploration subset has been particularly difficult.  Note that 4 of the 5 sectors in this group of 15 which yield more than 2% are in the “losers” column.  This helps explain why dividend-driven strategies have faced a strong headwind since the end of last summer.  And while Homebuilding stocks made a respectable 7.5% return during this 12-month period, that does not come close to the gaudy numbers put up by the “winners” group above.  It remains to be seen how the Homebuilding sector will react to the threat of higher interest rates while simultaneously dealing with a feverish environment for home prices that reminds some of us of a decade ago.

This is just a snapshot, and there are many other sectors we can review.  But the recent performance of this core group of U.S. economic areas and the stocks that comprise them should be something investors keep in mind when determining their approach for this, the historically weak period of the year for the broad stock market.  I expect to revisit this list of “winners and losers” at some point in the future, at which time it will be interesting to see to what extent the list has flipped once again.

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