Within the SP 500 there are 10 sectors that comprise the key benchmark, and it remains my preferred way of dissecting the market for clients, and giving clients an orderly structure or framework to think about the giant morass that are the capital markets.
The primary tool for analyzing sectors for clients remains the excellent sector earnings work done by Thomson Reuters and Factset, as well as Howard Silverblatt of Standard & Poors, and Estimize (although Estimize has a narrower focus than the other firms) which is shared every week on this blog for readers. (Sam Stovall of Standard & Poor’s wrote a book on sector investing that was published in 1996. I just found the book on Amazon and bought it for some holiday reading this weekend.)
Why worry about sectors ? Well give this a little thought:
- The bull market in the SP 500 that ran from August, 1982 to March of 2000 was dominated by two sectors: Technology and Financials. A lot of the old market pundits and the so-called guru’s from the 1990’s used to say that “The Financial’s are the market general’s” and there was real truth to this. The Financials were the SP 500’s primary market leader in the 1980’s and 1990’s.
- The SP 500’s decade-long bear market from 2000 through 2009, the decade with the lowest average return for the SP 500 since the 1930’s, was a result of brutal bear markets in two sectors (guess which sectors): yes, Financials and Technology. technology came first, with the Nasdaq correcting 80% from March, 2000, through October, 2002, and then the mother-of-all sector corrections with Financials stocks correcting (looking at the XLF) from $38 to the $6 area from mid-2207, though late 2008, early 2009.
- Technology as a percentage of the SP 500’s total market cap hit a peak of 33% in the first quarter of 2000 (really unbelievable when you think about it) and Financials hit their peak in mid-2007. I thought that Financials had gotten close to 30% as a percentage of the SP 500’s market cap, but from looking at historical data,. maybe Financial’s peak total of the Sp 500 was closer to 25% rather than 30%.
- The reason the Energy bear market hasn’t really impacted the SP 500 like the Technology and the Financial’s collapse, is that when crude oil started to fall from $110 to today’s $35 – $37 per barrel, Energy as a percentage of the market cap of the SP 500 was just 10%. It is now roughly 6.5% today.
- As the above implies, “Size (in terms of market cap) Matters”.
- Three bear markets: Technology, Financial, Energy – all sector-driven.
Which brings us back to 2016 and expected returns for the SP 500 therein:
Here is our latest spreadsheet where we updated sector weightings (FC – marketcapvsearningswt).
As readers can see from this spreadsheet, Technology and Financials remain the two largest sectors within the SP 500 at 37% of the SP 500 and since they had their absolutely crushing bear markets in the last decade, what are the odds (in your opinion) that Technology repeats 2000 – 2002 or Financial’s 2007 – 2009 ? 20% corrections can happen at any time for a variety of reasons, but would a reader think that Financials and Technology could correct 30%, or 40% ?
Here are the sector weightings for the SP 500 as of late December ’15 (courtesy of Bespoke, rounded to the nearest 1%):
Technology: 21%
Financials: 16%
Health Care: 15%
Cons Disc: 13%
Industrial’s: 10%
Cons Spls: 10%
Energy: 6% – 7%
Utes, Mat, Telco: 3% each
The top 5 sectors of the SP 500 are 75% of the market cap of the SP 500. The top sectors which we’ve discussed at length are 37%.
Consumer Discretionary’s 10% return year-to-date is heavily influenced by Amazon (AMZN), since the stock is a member of the Consumer Discretionary sector. Bespoke has noted without Amazon’s 140% return year-to-date, Consumer Discretionary would be up just 2% – 3% in 2015.
Conclusions about 2016: Given the above, and the Technology and Financial’s weights I just dont think there is a sustained bear market in our future. Technology and Financials remain the largest sector overweight’s for clients, coming into 2016. I’m leery of Health Care in a Presidential election year. I do like Industrial’s in 2016 IF the dollar can remain right where it is, or weaken a little.
The biggest change to client accounts in the last 4 months has been adding the XLE, and the IYE to client accounts with the market correction in August – September. We havent had any Energy exposure for years. There is more owned now than at any time in the last 5 years. Also bought in September, early October were the VWO, and EEM, or the Emerging Markets ETF’s. The under-performance of emerging markets relative to the SP 500 the last 7 – 8 years has been remarkable. We have never owned Emerging Markets for clients before these positions.
Finally, I took a shot at some Brazil (EWZ), the last month. Brazil is the confluence of Energy risk, commodity risk, socialism, and inept incompetence, in one ETF.
There is an approximate weighting of 5% in Energy, Emerging markets and Brazil in client accounts, depending on a number of other factors.