“Tech is doing well” or “Utilities are lagging”— both phrases you may have heard to describe the stock market this year. But what exactly are people talking about? The financial media and financial professionals (yes, us) have a habit of using industry jargon—necessary at times, but also a bit confusing at times. Because 2022 and 2023 have seen dramatic moves in both directions, let’s take a minute to expand on what we are talking about here. Hopefully it can be made a little less disorienting.
As most are aware, the stock market consists of various “sectors” or “industries”. Officially there are 11 of them: Information Technology, Financials, Energy, Consumer Discretionary, Consumer Staples, Utilities, Health Care, Materials, Communication Services, Real Estate, and Industrials. Within the S&P 500, each sector is represented by 20-80 companies. By percentage weighting, the largest is Information Technology at ~29%. The smallest is Real Estate at around 2.5% (note: these weights are constantly changing as the value of the stocks in the sectors change).
It makes sense to lump these companies together as they face similar industry headwinds and tailwinds, and their stock prices can move in close tandem as a result. Sometimes this can be seemingly unrelated to the overall stock market. 2022 and 2023 is a good example of this. Last year the S&P 500, a good proxy for the overall stock market, declined 18%. The worst performing sector was Communication Services (Facebook, Google, Netflix, etc.) which lost 40%. In contrast, the top performing sector in 2022 was Energy which gained 66%—a big difference! After their experience in 2022, investors were no doubt discouraged by the performance of Communication Services (and Tech generally) and relatively more bullish on Energy. But 2023 has shown how quickly sector leadership can change and provided a (yet another) reminder about diversification and patience. Communication Services, the worst performer in 2022, has turned out to be the best performer in 2023 so far (+45%). And a 2022 outperformer, Utilities, has turned out to be the worst performer in 2023 so far (-17%).
For broader context, these large performance gaps between the top and bottom sectors are not that unusual—in the past 5 years it has averaged roughly 55 percentage points. A key takeaway is regardless of overall market performance, a client’s own portfolio could perform very differently if they aren’t properly diversified. While it can be tempting to gravitate towards sectors with good recent performance, often it is too late, the sector falls out of favor, and investor portfolio returns suffer.
All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.