Advisors who make seasonal or tactical adjustments to client portfolios may find it useful to know which sectors are naughty and which are nice as the famed Santa Claus rally approaches.
Here’s how each of the 10 sectors in the S&P 500 performed, on average, since 1990. The numbers are courtesy of Sam Stovall, U.S. equity strategist at S&P Capital IQ.
In case you are wondering why the data only go back to the final decade of the 20th century, it is because the system for categorizing sectors is fairly recent. The Global Industry Classification Standard (GICS) was developed jointly by MSCI and S&P to categorize stocks in 10 sectors divided into industry groups, industries, and sub-industries.
Developed in 1999, the GICS categories were backtested to 1990, which is why we have performance data by sector from then. Why not earlier? When you think about it, today’s economy looks very little like the business and financial landscape of the middle of the last century. Fifty years ago, the U.S. telecom services industry was dominated by a monopoly, the steel industry was a major part of the economy, and current technology giants including Apple, Microsoft and Oracle didn’t exist.
Here’s how each sector performed in the fourth quarter.—Joseph Lisanti
Information Technology +6.6%
This sector includes providers of data processing services, makers of office equipment and producers of communications equipment. Yet those aren’t necessarily the drivers of the final period surge in tech stocks. The sector also notably features computer hardware and software makers and video game companies, whose products were long near the top of the list of holiday gift ideas. And the company with the largest market capitalization in the sector (and in the S&P 500) is Apple, whose stores boast the highest sales per square foot in retailing.
Consumer Discretionary +6.3%
Discretionary purchases are, by definition, activities that buyers can postpone. But in the holiday shopping season, few consumers postpone them. Companies in this sector often look to the final quarter to book much of their annual profits. Retailers are major beneficiaries, as are restaurants, which gain from both family and office holiday parties. Broadcasting and cable companies are aided by advertising for gift items, including cars festooned with big bows. Although auto makers and dealers are included in the sector, they are not the major drivers (pun intended) of fourth-quarter performance.
Consumer Staples +6.2%
Food and beverage producers do well in the fourth quarter as families stock up on their wares for Thanksgiving and Christmas. Distillers and vintners are in this category and their products also benefit from gift purchases. Of course, retailers and distributors of these products see increased demand during the holidays. Personal products makers are also in this sector. While shampoo and deodorant makers may not gain much from holiday sales, companies that make perfumes are in the personal products industry and sell popular gifts.
It may be difficult to see how industrial sector companies can benefit from factors that aid holiday-related sales in other sectors. After all, makers of electrical equipment, construction machinery, and aerospace products rely on long-term contracts, not seasonal surges. But the sector also includes transportation companies. Railroads, truckers and air freight companies deliver products to retailers and many of them also benefit from increased online shopping. Airlines see some of their busiest days during fourth-quarter holidays.
Health Care +5.7%
Hospital stays and prescription medications are nobody’s idea of a holiday gift. Most health care spending is unaffected by seasonality; people spend for health care as needed. As a result, the fourth-quarter performance of the sector is right in the middle of the pack. You may think that year-end flexible spending may boost drug stores. That may be true, but they are in the consumer staples sector. What about eyeglasses? Luxottica, with 7,000 retail stores and 80% of the world’s eyewear brands, might benefit. But it’s based in Milan and not in the S&P 500 index.
Chemicals, steel, and construction materials are not likely to get any boost from year-end spending. On the other hand, makers of metal and glass containers could see some increase in sales due to consumption of beer, wine and distilled spirits during the holidays. And as more consumers buy gifts on the Internet, producers of cardboard packaging should benefit. Gold and platinum miners can attract attention as jewelry sales improve over the holidays.
Telecommunication Services +4.5%
Although long distance phone traffic increases near the holidays, voice communications are almost an afterthought for the industry today. For many wireless phone users, traditional phone calls are essentially free when they pay for data service. The sector is dominated by two companies, AT&T and Verizon, but is too small and concentrated to warrant a standalone Sector SPDR ETF. Telecom services is part of the Technology Sector SPDR ETF (XLK), where the two telephone giants make up a little more than 9% of the portfolio.
Credit card companies benefit from holiday spending on their cards. But banks, thrifts, asset managers and insurance companies see little benefit from holiday shopping. The sector would have fared better in the rankings were it not for the fourth quarter of 2008 when it plunged 37.6% during the financial crisis.
Holiday lights may shine brightly, but they do little to boost this mostly regulated sector. Although electric and gas usage may increase in colder parts of the country during the quarter, that is countered by reduced use of power in the air conditioning off season in warmer regions.
There would seem to be nothing inherently positive or negative about the energy industry’s fourth-quarter performance. Yet two of the steepest slides in crude oil prices in recent years have occurred during the final period of the year. In 2014, the WTI spot price fell about 45% in the final quarter. And in 2008, as the economy tumbled, the spot crude price declined more than 60%.