Broker Check

What are Sectors?

| September 26, 2017
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A large portion of being a successful investor has to do with creating a plan and being able to stick to that plan, no matter what.

There is also a portion that has to do with being able to adapt in changing economic environments. I know, it’s contradictory, but being able to overweight in certain areas and underweight in others depending on the market is an important skill to have.

Sectors are a perfect example of an area that could be favorable or not, depending on the economy.

In this article, we’ll look into what sectors are, the different types of sectors, and how each reacts in the market.

Definition

A sector is a specific area or share of the economy that sells the same or similar products or services. Additionally, an industry is a subset of sectors.

For example, information technology is a broad sector. Software, hardware, and cloud computing would all be industries within that sector.

Different types of sectors

There are many different types of sectors.

  • Technology
  • Finances
  • Energy
  • Industrials
  • Materials
  • Consumer Discretionary
  • Consumer Staples
  • Telecommunications
  • Healthcare
  • Utilities

Most of these are self-explanatory. Consumer discretionary is things like durable goods, cars, entertainment, and leisure. Consumer staples is things like food, beverages, and tobacco.

How they respond to economic activity

There are some sectors, like technology and consumer discretionary that should do very well in bull markets because an increase in the company stock price will encourage investment, thus creating more cash flow for the company.

Conversely, there are some sectors that do better than others during bear markets, like consumer staples and utilities. That’s because everyone needs to eat, drink, and heat/cool their house, no matter what the economy does.

What also plays a role are the various industries inside each sector. For example, healthcare can be considered a defensive sector because people need health care, no matter the economic environment, but with certain industries like medical equipment or biotechnology, investment within that industry will increase with more favorable conditions (i.e. bull market).

Sector performance

Over the past 10 years, this is how each sector has performed.

  • Technology - +497%
  • Finances - +426%
  • Energy - +52%
  • Industrials - +366%
  • Materials - +210%
  • Consumer Discretionary - +570%
  • Consumer Staples - +172%
  • Telecommunications - +70%
  • Healthcare - +304%
  • Utilities - +148%

We have had 10 years of up and to the right. Meaning we are in the 10th year of this bull market.

Because consumer staples, utilities, and telecommunications are classified as defensive sectors, they’ve underperformed.

The energy sector underperformed due to a large pullback in oil prices, with a bottom around $30 per barrel in 2016. The high was around $120 in 2011.

The remaining sectors did extremely well with consumer discretionary leading the way. Remember this sector does well when the economy does well. Same goes for technology, finance, and industrials.

Healthcare is somewhere in the middle of defensive and growth. It does better than the defensive sectors during bull markets, but not as good as others.

Conclusion

As stated, there are many different kinds of sectors. Each of them has its unique characteristics and reactions to economic data. Knowing what the economic conditions are and what sectors perform better during those conditions could set you apart.

If you want to learn more about sectors and how to invest in them, drop me a line.

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