Sector Divergence in a Rebounding Market
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 10/23/15. Rates and Economic Calendar Data from Bloomberg as of 10/26/15.
Stocks continued their rebound last week and the S&P 500 Index is now 8.2% higher compared to its Q3 ending value on September 30. Since the U.S. equity markets hit a 2015 bottom on August 25, they have now gained over 11% and are on track to finish the year in positive territory. This recent strength comes in the face of a strong U.S. dollar weighing on corporate profits (33% of S&P 500 company’s aggregate revenue is generated from overseas1), negative earnings growth (quarterly earnings for the S&P 500 Index are expected to decline 2.1%2), and global growth concerns (the IMF revised down their 2016 global GDP growth estimate from 3.8% in July to 3.6% in their October report3).
In order to explain and understand the performance of a portfolio of stocks, it is important to consider not only the performance of the market in aggregate but also the sectors and individual components that underlie it. This year, as is typically the case each year, there has been divergence in the performance of the ten sectors that comprise the S&P 500. What appears atypical this time around is the divergence in the direction of their YTD returns.
You can see that exactly 50% of the sectors are in positive territory and 50% have generated negative returns through the end of last week. Since 2006, there has only been three occurrences when all ten of these sectors did not all move in the same direction. In 2007, the Consumer Cyclical and Financial Services sectors (both cyclical in nature) experienced negative returns despite the other eight sectors posting gains. In 2011, Materials, Financial Services and Industrials (all three being either cyclical or sensitive sectors) also lost value while the remaining sectors finished higher4. Finally, last year saw all sectors finish higher with the exception of Energy which infamously declined in concert with lower oil prices. This year, the divergence is wide spread across cyclical, sensitive and defensive sectors and appears, at this time, to be characteristic of a stable but low growth U.S. economy that is dealing with a collapse in the price of energy related commodities and uncertainty in terms of future growth potential and interest rate activity.
Basing investment decisions on recent historical data alone may not yield a diversified portfolio that can withstand the likely continuation of volatility and divergence in sector returns that we have seen this year. We recommend that anyone looking to invest for growth in this challenging market environment seek the advice of a professional portfolio manager. If you would like to learn more about the strategies that Hennion & Walsh is using with clients in today’s market, or to simply request a portfolio review, please speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.