There’s an argument to be made for sector investing. The "stock market" is really comprised of many individual markets. For instance, the S&P 500 is broken down into ten industry sectors and while one sector may be weak, another may be strong. Meanwhile, the S&P 500 might be flat. Case in point: the S&P 500 was higher by 0.6 % through May 6 on a year-to-date basis. But, digging deeper within the 10 sectors, some were higher by double-digits since the start of the year. Of course, other sectors were lower for the year.
"Every sector tends to have its day in the sun, depending on where we are in the economic cycle," says Sam Stovall, managing director at S&P Global Market Intelligence. Analyzing the first four months of sector market returns, Stovall concedes, "The market is sending mixed messages."
Here's a quick snapshot of the biggest S&P 500 sector gainers year-to-date and the biggest losers.
Energy + 8.7%
Materials + 5.9%
Telecommunication Services + 11.5%
Utilities + 12.6%
Financials – 3.2%
Health Care – 4.1%
Information Technology -3.3%
Data source: S&P Global Market Intelligence. Year-to-date returns through May 6, 2016.
Stovall highlights the gains in energy and materials and says, "One might think we are in the mid-latter phase of the economic expansion." Yet, at the same time he says, "We see leadership by telecom and utility stocks, which would imply we are in a defensive stock market mindset."
Is the Fed Confusing Investors?
The Federal Reserve and the slow pace of its current interest rate hiking cycle may be to blame for the market's split personality, Stovall says. "Utilities and telecom offer the highest dividend yields in the S&P 500. Now that the Fed has implied they’ll raise the fed funds rate twice in 2016 rather than the original estimate of four times, investors have rotated back into higher yielding groups for income."
The Fed's inaction thus far in 2016 has also weighed on the financial sector, says JJ Kinahan, chief market strategist at TD Ameritrade. "Many financial stocks went up on prospects of higher interest rates. That hasn't happened and now most of them are getting punished," he says.
Looking elsewhere, the strong gains in the energy sector can be tied to the gains in the crude oil market, Kinahan says.
For active investors looking to capitalize on seasonal and sector price swings, it may be worth examining some market trends. "There are always sectors of the market that perform better than other places," says Kinahan.
Is the Doctor In?
Looking ahead, Stovall highlighted the health care sector, traditionally known as a defensive sector within the S&P 500. After all, no matter the economic cycle, people still need to go to the doctor. As the S&P 500 enters its seasonally weak period from May to October, historical price data reveals certain sectors tend to outperform and health care is one of them.
Over the past 25 years, the health care sector posted an average 4.5% return in the May to October period versus a 1.5% gain in the S&P 500 during that time period, Stovall says.
Health care earnings are forecast at a robust 7% gain in 2016 versus a flat year-over-year earnings gain for the S&P 500, Stovall notes. Also, "the health care sector is trading at a discounted P/E to the market based on 2016 estimates. Investors who believe in ‘Sell in May’ and 'buy low and sell high' might be attracted to the health care sector and its prospects over the coming six months," Stovall says.
Search for Sector Candidates
Use Stock Screener to narrow selections based on sectors and more. Log in to tdameritrade.com > Research & Ideas > Screeners > Stocks