Market Overview

Equities: Will Early Trends In Select Sectors Last?

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The COVID-19 pandemic has created unprecedented challenges to everyday life. As people stay home to reduce the spread of the virus, large parts of the economy have been shut down. Travel remains limited, and consumer behavior has shifted, with shopping and interacting online gaining in prominence.

These may not be a reversal of previous trends, but rather a dramatic and abrupt acceleration of them. Even before the pandemic, social networking, virtual meeting technology, and online shopping were on the rise. A trend towards reduced per capita fossil fuel consumption was underway and energy markets had generous, though not excessive, supplies.

Amid the economic shock of the pandemic, S&P 500 returned -8.3% in the first four months of 2020, but with a wide dispersion among the index’s various sectors. Notwithstanding the enormous volatility, as of April 30, information technology, health care, and consumer discretionary stocks had barely changed from their closing levels on Dec. 31, 2019. Other sectors like materials, industrials, financial, and energy have suffered substantial losses, with the energy sector returning -34% (Figure 1).

Figure 1

Figure 1

Curiously, the sectors that have had the best returns so far this year have largely been the same sectors that did well during the 2010s. The best performers during the 2010s were information technology, health care, and consumer discretionary stocks. Among the worst performers during the 2010s were energy stocks and materials. In both the 2010s and so far in 2020, consumer staples, and utilities have delivered close to average returns (Figure 2). In other words, when it comes to a sector’s relative performance, the pandemic seems to have accentuated existing trends.

Figure 2

Figure 2

To be sure there are differences. Telecom stocks lagged during the 2010s. They have been an outperformer so far in 2020.  Industrial and financial stocks finished near the middle of the pack during the previous decade. They were among the worst performers in the first four months of 2020. Still, the overall correlation between the sector performance during the 2010s and their respective performance so far in the 2020s has been +0.65 (Figure 3).

Figure 3

Figure 3

While it might seem fair to extrapolate sector performance from the 2010s and thus far in 2020 deeper into the decade, for the past three decades, the previous decade’s winners often turned out to be the next decade’s underperformers.

For example, while the 1990s (Figure 4) and the 2010s look a lot alike, the intervening decade was largely the opposite.  During the 2000s, energy, consumer staples, and materials stocks led, while IT, financials, telecom, and consumer discretionary stocks fell behind (Figure 5).

Figure 4

Figure 4

Figure 5

Figure 5

Indeed, between the 1990s and the 2000s, the correlation among sector performances was -0.56 (Figure 6). From the 2000s to the 2010s, the correlation among sector performance was -0.40 (Figure 7). If one had extrapolated the relative performance trends of sectors from the 1990s into the subsequent decade and invested on that basis, one would have dramatically underperformed the market. Likewise, on New Year’s Day 2010, if one had assumed that the 2010s would look like the 2000s in terms of sector performance, one would have been wrong as well.

Figure 6

Figure 6

Figure 7

Figure 7

Nobody would have expected the first four months of the 2020s to turn out the way that they have. Likewise, nobody can know how the rest of the decade will turn out. But, when it comes to relative performance of the various equity sectors, prepare to be surprised. It is possible that the hardest hit sectors, like energy and materials stocks, could turn into winners. Oil prices might rebound later this decade to the benefit of energy sector stocks. Likewise, high-flying IT companies might have difficulty delivering the results that investors have currently priced. Consumer and health care stocks might not prove to be as insulated from the impact of the pandemic and other forces, as some expect.

Bottom line

  • So far in 2020, the sectors that led in the 2010s are in the lead
  • Between the 1990s and the 2000s, outperforming sectors often became underperformers
  • From the 2000s to the 2010s, relative sector performance again reversed
  • Be careful about extrapolating 2010s or 2020 sector performance into the future
  •  

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