We’ve been focused on the 2008/2009 experience for US equity markets as the anchor to our COVID-19 playbook, so today we’ll rewind the clock to look at the sector concentrations of the S&P 500 then and now. The idea here:
- Sector composition informs everything from cyclicality to long term growth potential and, of course, valuation.
- Like every other broad stock market index, the S&P 500’s sector weightings change daily, but obviously by small amounts.
- Over the longer term, sector weights change dramatically as different industries rise and fall in terms of sustainable profitability and return on capital.
Listed here are the S&P 500 sector weights as of the end of March 2009, the month in which the S&P 500 finally bottomed after the Financial Crisis:
- Technology: 18.0%
- Health Care: 15.1%
- Energy: 13.0%
- Consumer Staples: 12.8%
- Financials 10.8%
- Industrials: 9.7%
- Consumer Discretionary: 8.9%
- Utilities: 4.3%
- Telecomm: 4.0%
- Materials: 3.4%
And here is where we stand today, with some basic adjustments to incorporate sector changes made since 2009:
- Technology: 30.3% (adding back Google and Facebook, currently in Communication Services).
- Health Care: 15.2%
- Financials: 13.8% (adding back Real Estate current 3.0% weight)
- Consumer Discretionary: 11.9% (adding back Disney, Comcast and Netflix, currently in Comm Services)
- Consumer Staples: 8.2%
- Industrials: 8.0%
- Telecomm: 4.3% (Comm Services minus adjustments noted above)
- Utilities: 3.5%
- Materials: 2.4%
- Energy: 2.4%
Our 3 key takeaways from this comparison:
#1: The S&P 500 today is structurally very different from the index in 2008/2009:
- Energy was 13-14% of the S&P 500 throughout during the depths of the Financial Crisis in Q4 2008/Q1 2009.
Now, it is 2.4% of the index, losing 11 points of market cap weighting in the last 11 years.
- The Technology sector has increased 12 percentage points in S&P weighting over the last 11 years, meaning essentially that the index swapped 1:1 out of Energy and into Tech over that time.
Bottom line: the S&P 500 is much less cyclical now than it was in 2008/2009, which is on balance a positive but comes with its own challenges. Technology as a sector is much more reliant on non-US economic growth than Energy (56% of revenues versus 40%). Moreover, Tech tends to have higher valuations than Energy and can be therefore a more volatile group. On the plus side, Tech is a more dynamic industry and is clearly better positioned to weather the current economic storm than Energy.
#2: Current sector weightings in defensive groups are not yet at their 2008/2009 levels.
- Consumer Staples’ weighting hovered around 13.0% in Q4 2008/Q1 2009.
It is currently 8.2%.
- Utility’s weighting ran from 3.8% – 4.5% during the same period.
It is currently 3.5%.
Bottom line: by this measure, we are not yet at the bottom for the S&P 500 since capital has not crowded into these “safe” groups as much now as then.
#3: While Financials are not at the epicenter of the COVID-19 Crisis the way they were in the Financial Crisis, we’re still monitoring their weight in the S&P 500 as a sign of market confidence in the US financial system.
- The measures taken by US states/Federal government to contain the virus have an obvious impact on businesses’ and consumers’ ability to service debt.
- The lowest weighting for Financials in the S&P 500 during the Financial Crisis came in February 2009 at 9.8% (again, what is now the Real Estate sector plus the current Financials weight).
- Assuming Real Estate holds its current 3.0% weighting, the low water market for Financials would be 6.8% versus its current 10.9% weight.
Bottom line: since the first US equity “crash day” on March 9th Financials have not done materially worse than the S&P 500 (-16.4% vs. 16.1%) and that is largely due to investor confidence that the Fed’s Stress Tests have set up this sector to survive a severe economic contraction. That relative stock performance needs to hold as a signal that markets believe the American financial system remains ready to operate through whatever comes next.