Sector Rotation Through Second Quarter of 2020Submitted by Reed Financial Group on July 9th, 2020
What a difference a quarter can make as sectors diverge and rotate
Over every single time period, sector performance will be driven largely by factors one would expect, such as the overall state of the economy, underlying corporate earnings, current and predicted interest rates, and inflation, among other factors.
Reviewing the sector performance through the end of the second quarter of 2020, two things become very clear:
- First, sectors do not move in lock-step with one another and will often provide very divergent returns for investors – depending on timing and the current economic climate; and
- Second, Q2 saw quite a bit of divergence from the first quarter of this year and the final quarter of 2019.
Sector Returns Through End of Q2 2020
The overall trend for sector performance since the end of the first quarter has been mixed, as performance leaders and laggards have rotated all year. Focusing on the end of the first quarter, for example, investors saw that every single one of the 11 S&P 500 sectors turned in negative numbers, whereas April saw all of them positive and May saw most of them positive.
The month of June, on the other hand, saw more than half of them painted red and less than half of them painted green.
Reviewing the sector returns for the second quarter and YTD through June 30, 2020, we saw that:
- Every single one of the 11 S&P 500 sectors was painted green for the second quarter of 2020
- The Utilities sector was the worst performer for the second quarter as it barely crept into positive territory
- The differences between the best performing and worst performing sectors in Q2 were once again dramatic, with three sectors (Consumer Discretionary, Information Technology and Energy) up more than 25x the Utilities sector
- On a YTD basis, the difference between the best and worst performing sectors is just as dramatic, with a difference of over 50% as Information Technology sector is up over 14% YTD and Energy is down a whopping 37%
- Speaking of Energy, this sector has been on a wild ride in 2020 as it gained more than 30% in the second quarter and is still down almost 40% YTD
Sector Performance Through Q2 2020
Here are the sector returns for YTD through June 30th as well as for Q2, both relatively short time periods:
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results. Source: Standard and Poor’s
What Does It Mean for Investors?
At a very basic level, the differences in returns for the 11 S&P 500 sectors support two fundamental principles of financial planning – asset allocation and diversification.
At your next portfolio review, let’s revisit the differences between asset allocation and diversification. And how to ensure your portfolio is consistent with your risk profile and personal goals.