Winner and Loser sectors in 2020
The performance of the 11 main sectors in the S&P 500 index in 2020 was very different in the last 12 months. I call them “The 11 Riders of the Cataclysm” because the deep coronavirus-crisis is affecting all industries. The best sector, “Information Technology” returned 52.69 percent. The worst, energy, –41.01 percent in 365 days. (Total return indices, that means, gross returns, with the dividends, included, and before taxes.)
That means, if you invested $100 in technology in October 2019, you have $152.69 today. And only $58.99, if you spent the same amount on Energy stocks a year ago. The difference is huge. Other clear winners are the Consumer Discretionary and Health Care branches, also Communication Services, and Materials. There were smaller losses in the Utilities, Real Estate, Financials sectors. (See the table at the end.)
Explanation of some S&P 500 Sectors
- Communication Services: mostly media, social media, and telephone companies.
- Consumer Discretionary: products and services which demand fluctuates based on general economic conditions. Durables, automobiles, hotels and restaurants, retailers, luxury.
- Consumer Staples: “necessities of life”, with stable demand. Basic or essential consumer products as food, beverage, household goods, hygiene products, alcohol, and tobacco.
- Health Care: pharmaceuticals manufacturers, hospitals, health care equipment and services, and biotechnology.
- Materials: raw materials other than energy, for example, gold mines, other mining companies, chemicals, construction materials.
- (Sources: Corporatefinanceinstitute, FXCM)
The Long Term S&P 500 Sector Performance
You can see a longer-term picture on the infographic, on the next chart, and also in the table at the end. What I find interesting is that in the last 8 or 10 years, the S&P 500 sector performance was very similar to the last 12 months. Information Technology, Consumer Discretionary, and Health Care were the big winners. Energy, Real Estate, or Materials lagged far behind the others.
But there were also some changes in the rankings. In the crisis, the communications sector and some mines, such as metals, became more important. Financial service providers lagged, banks were at a disadvantage. (Because of lower interests, elevated risks of bankruptcy.) The energy sector has sunk even deeper as crude oil and natural gas prices nose-dived.
Don’t Generalize, Pay Attention to These Sectors
The daily news in which the stock market is going up or down allegedly means little or nothing with such huge sectoral differences. The market now often talks about the difference between value and growth-focused stocks. Or they try to explain the discrepancies in the stock market distinguishing online and traditional sectors.
Many experts warn that the popular index-following investment strategy is over. It is not advisable to just buy a broader stock index such as the S&P 500. Better choose between different sectors.
The question is, how. How much longer will online services outperform? If the much-expected vaccine arrives, will the world return to pre-coronavirus levels? How long the crisis will be? Should we buy online or traditional companies? Growth or value? Or sensitive, defensive, or cyclical sectors, to mention other taxonomic methods?
Contrarians and Trend Followers
Trend-following investors continue to buy sectors that have performed better so far. By contrarian investors, it may be wise to buy cheap stocks, accumulate those that are in a pit. Some day there will also be high air traffic, oil consumption in the world, again. The golden age of banks may dawn. But it may be preceded by a big wave of bankruptcies in the economy, wiping out 20 to 40 percent of the current firms. And pushing some sector indices even deeper before the next big boom.
Dividends are important but don’t change the big picture. In the table, you can compare the total return indices (gross returns) containing dividends, and the price return indicators, where dividends are excluded. Net total return indices contain the payouts, but taxes are discounted.
(By “11 Riders of the Cataclysm” I didn’t mean the Four Horsemen of the Apocalypse.)
Performance of the 11 S&P 500 Sectors (Oct. 9, 2020)
|Index||Price return||Total Return||Price Return||Net Total Return||Total Return|
|S&P 500 Information Technology||50.78||52.69||18.94||20.16||20.68|
|S&P 500 Consumer Discretionary||35.38||36.86||16.63||17.83||18.36|
|S&P 500 Health Care||23.02||25.24||13.47||14.96||15.60|
|S&P 500 Communication Services||20.00||21.49||5.09||8.21||9.56|
|S&P 500 Materials||19.68||22.40||19.68||8.71||9.42|
|S&P 500 Consumer Staples||8.38||11.54||8.78||10.98||11.93|
|S&P 500 Industrials||8.29||10.44||9.35||11.04||11.77|
|S&P 500 Utilities||-1.04||2.34||7.16||10.01||11.26|
|S&P 500 Real Estate||-5.75||-2.73||7.15||n. a.||10.67|
|S&P 500 Financials||-6.64||-4.28||7.81||9.31||9.96|
|S&P 500 Energy||-43.93||-41.01||-6.06||-4.13||-3.29|
|Source: S&P Global|