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This was originally published on December 29, 2015 Within the S&P 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 is 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 & Poor’s, 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 S&P 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 gurus from the 1990s used to say that “The Financials are the market generals” and there was real truth to this. The Financials were the S&P 500’s primary market leader in the 1980s and 1990s. The S&P 500’s decade-long bear market from 2000 through 2009, the decade with the lowest average return for the S&P 500 since the 1930s, 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 Financial stocks correcting (looking at the Financial Select Sector SPDR ETF (NYSEARCA: XLF )) from $38 to the $6 area from mid-2007, though late 2008, early 2009. Technology as a percentage of the S&P 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 S&P 500’s market cap, but from looking at historical data, maybe Financials’ peak total of the S&P 500 was closer to 25% rather than 30%. The reason the Energy bear market hasn’t really impacted the S&P 500 like the Technology and the Financials’ 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 S&P 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 and Energy – all sector-driven. 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 S&P 500 at 37% of the S&P 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 Financials’ 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 S&P 500 as of late December 2015 (courtesy of Bespoke, rounded to the nearest 1%): Technology: 21% Financials: 16% Health Care: 15% Consumer Discretionary: 13% Industrials: 10% Consumer Staples: 10% Energy: 6%-7% Utilities, Materials, Telecom: 3% each The top 5 sectors of the S&P 500 are 75% of the market cap of the S&P 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 (NASDAQ: AMZN ) since the stock is a member of the Consumer Discretionary sector. Bespoke has noted that 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 Financials’ weights, I just don’t think there is a sustained bear market in our future. Technology and Financials remain the largest sector overweights for clients coming into 2016. I’m leery of Health Care in a Presidential election year. I do like Industrials 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 Energy Select Sector SPDR ETF (NYSEARCA: XLE ), and the iShares U.S. Energy ETF (NYSEARCA: IYE ) to client accounts with the market correction in August-September. We haven’t 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 Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ), and the iShares MSCI Emerging Markets ETF (NYSEARCA: EEM ), or the Emerging Markets ETFs. The underperformance of emerging markets relative to the S&P 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 (NYSEARCA: 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. Scalper1 News
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