US Sectors: The Good, The Bad, and the Meh

The recipe for outperformance in 2018 has been freakishly simple: overweight the sectors that outperformed in 2017. For example:

Large Cap Technology:

  • The Tech portion of the S&P 500 is up 7.1% YTD
  • The S&P 500 itself is up 5.6%
  • Last year, the group was up 32.2%, versus the S&P 500’s 21.6% return

Financials:

  • Large cap banks/brokers/insurance companies are +7.6% on the year, also beating the S&P 500
  • Look back at their performance last year, and you’ll see they squeaked out a small gain versus the index – 58 basis points on a price basis

Health Care:

  • Even with concerns over the Amazon/JP Morgan/Berkshire deal, the group is still +6.6% on the year
  • Last year, large cap Health Care beat the S&P 500 as well, by 108 basis points

In contrast, consider the many sectors that are underperforming in 2018:

Utilities

  • Down 4.6% on the year, the worst of any S&P 500 sector
  • Price change last year: only up 7.7%

Real Estate

  • Down 3.7% in 2018, the second worst performing group
  • Only up 8.5% on a price basis last year

Energy

  • Large cap Energy names are only up 4.1% for 2018 YTD
  • They also lagged last year, rising only 4.5%

Consumer Staples

  • YTD return here is only 1.2%
  • Last year the group had a 9.5% price return

Telecomm

  • Up 0.4% in 2018
  • Down 16.0% last year on a price basis

Now, there are two sectors that performed well last year (coming close to matching the S&P 500 or slightly beating it) that are underperforming in 2018:

  • Materials: +2.6%
  • Industrials: +5.2%

And one sector – Consumer Discretionary – needs an asterisk.

  • The group worked well last year, matching the S&P 500.
  • And year to date that strength continues, up another 8.0%.
  • The troublesome bit is that Amazon is 19% of this group by market cap weight and that stock is up 19% in 2018. That makes the company’s gains in 2018 some 45% of the sector’s overall advance. Without Amazon, the group would be underperforming the S&P 500 by a wide margin in 2018.

In terms of actionable investment thoughts with this data, consider the following three points:

  • US stocks are still a momentum driven market as we move through Q1 2018. The first shall be first and the last shall be last, to borrow and twist a phrase from the Good Book.
  • Of the leadership groups at the top of this note, we still like Technology and Financials. Of the serious laggards, we would only look at Energy because we believe a growing global economy can support oil prices at current levels.
  • Of the in-betweens (groups that worked in 2017 but are stuck in purgatory this year), we like Industrials. Their mix of exposure to a weaker dollar and the chance for infrastructure spending hit two themes we think will work in 2018.

Now, if you are a contrarian and want to bet against the crowd, we would advise extreme caution just now. It generally takes a big shift in market psychology to redirect money flows and investor attention once they get set in their ways. That’s why 2018 sector returns look the way they do.

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