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The Top Performing Sectors in 2020, So Far

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The Top Performing Sectors in 2020, So Far

After a roller coaster start to the year, which S&P 500 sectors have seen positive returns, and which are still struggling to recover?

Energy prices collapsed as historic supply excesses hurt producers, refineries, and oil futures. Meanwhile, consumer behavior trends naturally bolstered the tech sector, as demand across online services soared. At the same time, the recent bounceback appeared to have been supported by a number of economic factors. Ultra-low interest rates, liquidity stimulus, and fiscal actions all helped to spur growth in stocks.

Today’s Markets in a Minute chart from New York Life Investments draws data from the S&P 500, showing how each sector has performed year to date amid historical volatility.

Coming Out On Top

Continuing the upswing seen in prior years, the tech sector has outperformed every other sector.

S&P 500 SectorsYear to Date Price Returns*
Information Technology
13.5%
Consumer Discretionary
7.6%
Communication Services
3%
Health Care
0.5%
Consumer Staples
-4.7%
Materials
-4.9%
Real Estate
-5.4%
Utilities
-5.9%
Industrials
-11.1%
Financials
-18.5%
Energy
-29.5%

*as of market close June 10, 2020

As of June 11th, the S&P 500 Information Technology sector has returned 13.5% YTD. This is impressive, considering that over the last decade, the sector averaged 17% in annualized returns. It goes without saying then, that large technology firms have proven resistant to 2020’s severe market upheavals.

Instead, housebound consumers are adopting tech at lightning-fast speeds.

“We’ve seen two years’ worth of digital transformation in two months.”

—Satya Nadella, Microsoft CEO

Sector Strength

Following tech, what are the most resilient sectors so far in 2020?

Both e-commerce and discount firms boosted the consumer discretionary sector. E-commerce sales are projected to rise 18% in 2020 according to one study. At the same time, travel-related stocks across the sector felt much of the pain as restrictions cratered demand and individuals stayed at home.

Top SectorsYear to Date Price Returns*
Information Technology13.5%
Consumer Discretionary7.6%
Communication Services3%
Health Care0.5%

*as of market close June 10, 2020

Also weathering the storm was the communication services sector. Gaming heavyweights outperformed the index as a whole, as engagement and revenues witnessed positive momentum.

Surprisingly, the health care sector barely broke even. On one hand, there’s been surging optimism surrounding the eight S&P biotech firms developing COVID-19 vaccines. Investor enthusiasm led their combined market caps to balloon from $160 billion to over $600 billion within a narrow time frame.

Still, these gains were offset by a number of other health subsectors. The impact of COVID-19 created vulnerabilities across healthcare firms in dental, surgery, and physical therapy with high levels of debt. Additionally, 60% of firms in this sector have a ‘B’, or low credit rating, meaning they are more likely to default on payments.

Lagging Behind

As for the worst performing sectors, three have witnessed double-digit losses.

So far, it has been a harrowing year for the energy sector. Shifting mobility patterns coupled with a Russia-Saudi Arabia oil price war pushed oil prices into negative territory for the first time ever. Although this was a temporary event, current prices have still not recovered to anywhere near pre-COVID levels.

Worst SectorsYear to Date Price Returns*
Energy-29.5%
Financials-18.5%
Industrials-11.1%
Utilities-5.9%

*as of market close June 10, 2020

While energy dropped almost 30% year-to-date, financials also sank 18.5% as banking stocks failed to participate in the recent market reversal. An expected increase in loan losses is one possible factor behind investor skittishness, along with dampened lending activity.

Industrials, too, faced headwinds as supply chain disruptions threw a wrench in returns. Supplier plant shutdowns and transportation challenges weighed heavily on their operations. However, inventories and imports began to show signs of recovery in May.

Of course, there is still a long way to go. While there is renewed optimism as economies reopen, sustained consumer demand and economic growth figure prominently. At the same time, investors can stay open to sector opportunities as a future economic recovery steers ahead.

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Markets in a Minute

The Top Sources Americans Use to Make Investment Decisions (2001-2019)

Americans rely on business professionals the most when making investment decisions, but the internet has become increasingly important.

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investment decisions

This infographic is available as a poster.

How People Make Investment Decisions

When you’re making investment decisions, there can be a lot of different things to consider. Which types of asset classes should you hold? How much risk are you comfortable with? How much will you need to retire?

It’s no surprise, then, that few Americans make these decisions on their own. This Markets in a Minute from New York Life Investments shows which sources of information families rely on for investment decisions, and how their popularity has changed over time.

The Main Sources of Investment Information Over Time

According to data from the U.S. Federal Reserve Survey of Consumer Finances, here is the percentage of families who reported using each source.

Source200120102019
Business professionals49%57%57%
Internet15%33%45%
Friends, relatives, associates36%40%44%
Advertisements and media27%26%20%
Calling around19%16%13%
Other15%8%9%
Does not invest9%12%8%

Other consists of nine options: don’t shop, material from work, past experience, personal research, other institution, self or spouse, shop around, store or dealer, and telemarketer.

Business professionals, such as financial planners, accountants, and lawyers, remain the most relied upon source. Their popularity has remained stable since 2010.

Traditional advertisements and media, such as through TV and radio, have dropped in overall popularity. The percentage of Americans who call around to financial institutions for investment information has also declined.

Conversely, friends, relatives, and associates have grown in popularity as an information source. Meanwhile, the internet has been the fastest-growing source, used by three times more families in 2019 compared to 2001.

Digital Investment Decisions

A separate survey conducted by consulting firm Brunswick revealed the specific places people go online when making investment decisions.

Digital Investment Decisions

Search engines, blogs, and specialist email newsletters are the most popular sources. Among blogs, Seeking Alpha is the most popular, used by 34% of those surveyed.

Twitter and LinkedIn are the most commonly-used social media platforms. The proportion of investors using Twitter for information has grown by 36 percentage points since 2014.

Implications for Investors and Advisors

If you’re an investor, this information can help you gauge how your research process compares to the general American population. Is your preferred information source popular with others, or is it less common? For those who have yet to get started investing, this may give you some ideas on where you can start looking for information.

If you’re an advisor, these research trends can have important implications for your business. While business professionals remain the most-used source, other sources of information are shifting. Traditional advertising and inbound calls from potential clients continue to be less common. Instead, advisors may want to shift their focus to building an online presence and increasing referrals from existing clients.

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Visualizing Asset Class Correlation Over 25 Years (1996-2020)

To minimize volatility, it’s important to consider asset class correlation. Learn how correlation has changed over time depending on macroeconomic events.

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Asset Class

This infographic is available as a poster.

Asset Class Correlation Over 25 Years

How can you minimize the impact of a market crash on your portfolio? One main strategy is building a portfolio with asset classes that have low or negative correlation.

However, the correlation between asset classes can change depending on macroeconomic factors. In this Markets in a Minute from New York Life Investments, we show the correlation of select asset classes and how they have shifted over time.

What is Correlation?

Correlation measures how closely the price movement of two asset classes are related. For example, consider asset class A and B.

  • If asset class A rises 10% and asset class B also rises 10%, they have a perfect positive correlation of 1.
  • If asset class A rises 10% and asset class B doesn’t move at all, they have no correlation.
  • If asset class A drops 10% and asset class B rises 10%, they have a perfect negative correlation of -1.

When investors are building a portfolio, asset classes with negative correlation or no correlation are most desirable. This is because if one asset class drops during a market downturn, the other asset class will either rise or be unaffected.

Correlation Between Stock Categories

Stock categories have historically had some level of positive correlation. Here are the correlations for small and large cap stocks, as well as developed and emerging market stocks.

 U.S. Small Cap vs. U.S. Large Cap StocksDeveloped vs. Emerging Market Stocks
19960.640.51
19970.630.76
19980.970.87
19990.580.80
20000.380.74
20010.870.78
20020.730.90
20030.850.75
20040.830.79
20050.930.93
20060.750.93
20070.890.75
20080.960.95
20090.910.88
20100.960.97
20110.970.89
20120.910.89
20130.860.86
20140.750.78
20150.820.76
20160.890.73
20170.390.14
20180.880.73
20190.940.91
20200.930.89
Min0.380.14
Max0.970.97

Rolling 1-year correlations based on monthly returns.

When macroeconomic conditions are strong, the correlation between stock categories tends to be lower as investors focus on individual company prospects. However, when market volatility rises, stocks tend to become more correlated as investors move to safer assets.

This was the case in 1998, when small and large cap stocks reached a peak correlation of 0.97. Russia defaulted on its debt, and a highly-leveraged hedge fund called Long Term Capital Management (LTCM) faced its own defaults as a result. Many banks and pension funds were invested in LTCM, and the Federal Reserve bailed out the fund to avoid a bigger crisis.

Shortly thereafter, small and large cap stock correlation reached a low in 2000. The dotcom bubble initially burst among large cap stocks, impacting some of the world’s largest companies. Small cap stocks didn’t see losses until 2002.

For developed and emerging markets, correlation peaked in 2010 when many countries were recovering from the global financial crisis. On the other end of the scale, correlation plummeted to its lowest level in 2017. One reason is that emerging markets became more distinct from one another due to their varying political risk and sector makeup.

Bonds, Commodities, and Currencies

In contrast to stock categories, there are some asset class pairings that have provided a low or negative correlation. Here is historical correlation data for U.S. stocks and bonds, as well as gold and the U.S. dollar.

 U.S. Stocks vs. U.S. BondsGold vs. U.S. Dollar
19960.510.29
19970.68-0.40
1998-0.41-0.19
19990.34-0.36
20000.40-0.44
2001-0.39-0.38
2002-0.72-0.30
2003-0.04-0.43
20040.04-0.65
2005-0.20-0.27
20060.28-0.86
2007-0.44-0.55
20080.34-0.67
20090.64-0.33
2010-0.580.29
2011-0.35-0.59
2012-0.37-0.53
20130.33-0.11
20140.24-0.60
2015-0.26-0.10
2016-0.21-0.58
2017-0.09-0.23
2018-0.26-0.51
2019-0.37-0.51
20200.29-0.43
Min-0.72-0.86
Max0.680.29

Rolling 1-year correlations based on monthly returns.

Stocks and bonds generally have low correlation, with negative correlation in 14 of the last 25 years. Correlation tends to be highest during periods of high inflation expectations. On the flip side, correlation is typically lower during periods of low inflation expectations or high stock market volatility.

These factors contributed to negative correlation in 1998 during the Asian Financial Crisis. Stock prices flattened due to company trade relationships with Asian economies, while bonds benefited from lower rates and lower inflation. In 2002, high market volatility due to the dotcom bubble resulted in stocks and bonds reaching their most negative correlation.

Similarly, gold and the U.S. dollar generally move in opposite directions, with negative correlation in 23 of the last 25 years. When optimism in the U.S. economy is high, the U.S. dollar tends to rise. Conversely, when there are concerns about the U.S. economy or inflation, gold is considered a safe asset that holds its value.

In 2006, gold and the U.S. dollar reached their most negative correlation. As the beginnings of the subprime mortgage crisis appeared, investors piled into safe haven assets such as gold. In 2010, gold and the US dollar had a brief moment of positive correlation. Concerned about the European debt crisis, investors sought safe haven assets elsewhere, including both gold and the U.S. dollar.

Choosing Asset Classes

As investors think about which asset classes to include in their portfolios, it’s important to consider correlation. For instance, stock categories have historically been positively correlated. To diversify, investors may want to consider bonds and alternative assets such as gold.

In addition, macroeconomic events such as financial crises can have an impact on correlation, and investors may want to monitor these changes over time. Finally, considering the risk and return characteristics of various asset classes will allow investors to build a portfolio best suited to their needs.

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