Recently, I have seen a few analysts raise concern over how narrow the S&P 500’s performance has been when considering sector participation in the year’s advance. While it is true that as of the end of June only five S&P 500 sectors have so far registered positive total returns for 2018, – tech, consumer discretionary, energy, healthcare, and utilities, – it is also true that this is more noise than signal.
First of all, there have been only eleven years since 1990 in which all of the S&P 500 sectors registered positive results:
Given the relative rarity of all of the market’s components moving in unison, it is worth noting that since 1990, only half of the component S&P 500 sectors have matched or exceeded the overall index’s return:
In fact, far more common than all sectors moving up together is the overall index outperforming at least five of its ten sectors in a given year, which has happened in eighteen years out of the twenty-nine observed:
To be sure, it is is rare for the S&P 500 to be positive in a year in which at least five component sectors are negative, as is the case so far in 2018. However, the only previous occasions were in 1994 and 2015, and mixed results in those years did not portend any doom as strong results for the index and the majority of sectors occurred the following years.
It is important to remember that the various sectors within the index each respond differently to various macro events. For example, higher interest rates this year have played a part in hitting consumer staples and telecoms, while a flattening yield curve has been a negative for bank stocks. This is reminiscent of 1994, which may be a good analog for 2018; then, as now, rising rates on the back of Federal Reserve tightening policy played havoc with yield-sensitive sectors, and the overall market had to adjust to the new reality.
In sum, there are legitimate reasons to be cautious: not only is the market heavily tech-dependent, it is more concentrated now than even one year ago. It is also not particularly cheap, and there is a chance the Fed may overshoot with its tightening policy. However, divergences between the market and some of its components is pretty normal, and not, in my opinion, a great cause for concern.
