Sunday, March 30, 2008

Signposts: S&P 500 Sector Weightings

A tool for long term investment planning is the use of S&P500 sector weightings over a 30-40 year time horizon. Using the idea of "reversion to the mean", such a sector analysis will reveal good investing opportunities over a 10-20 year time horizon.

I don't think the information can be interpreted as precise. The definition of what stocks belong in what sector continually changes at S&P. So, the information is not useful in an absolute sense, but only relative to time and to comparative sectors. I think it is easy to see that when a sector underperforms its own average in a five or ten year period, it is destined to outperform in the next five or ten years and vice versa.

Take a look at energy in the 70s. It outperformed its average, which set up underperformance in the 80s and 90s, which then set up outperformance in the 2000s.

The underperfomance of Consumer Discretionaries in the 1975-85 period set up its mild outperformance in the 15 years (houses, cars and appliances are in this sector).

This analysis also shows that Financials were set for a decline in 2005, which we had been predicting on nearer term indicators as well (like P/E and book value). The long term average for financials is 10% of the total S&P500. The weighting is still above that at around 14% as of today. But, the American economy is also now much more financial and service oriented in 2008 than in 1970, so it may be close to its long term average going forward, or maybe a little under. Similarly, I don't think the Industrials will ever get back to their 35 year average of 13.5% of total, as much of manufacturing has moved offshore.

This analysis does suggest that Energy and Materials might have a little more strength, though the past 3 years has probably brought both sectors above their long term averages. The energy sector tends to have long periods of persistence as in the 1875-85 period, probably due to the difficulty of adding supply quickly. The other sectors that should have good long term results in the next 10 years are Telecom and Utilities according to this analysis.

What are the catalysts for those last two sectors to change their fortunes? I would suggest the convergence of cell phones, TV and the internet for telecom. For Utilities, it will be the widespread adoption of alternative energy generation in the form of Solar, Wind, BioFuel and eventually Hydrogen Fuel Cells as a sustitute for carbon-based energy (coal and oil).








































































































































































































































































































































































































S&P 500 Sector Weightings Through the Decades
             

                 


2005

2000

1995

1990

1985

1980

1975

1970

AVERAGE

Consumer Discretionary

11.4

10.3

13.0

10.1

12.5

7.3

8.9

12.5

10.7

Consumer Staples

10.7

8.1

12.8

16.4

12.5

8.7

11.2

10.3

11.3

Energy

8.7

6.6

9.1

13.1

11.6

28.2

16.6

15.7

13.7

Financials

20.2

17.3

13.1

7.2

7.0

5.0

4.6

4.8

9.9

Health Care

11.8

14.4

10.8

10.3

6.9

8.0

6.9

4.8

9.2

Industrials*

11.6

10.6

12.6

11.9

14.4

15.0

15.2

16.6

13.5

Information Technology

15.3

21.2

9.4

8.8

14.8

8.7

10.7

11.5

12.5

Materials

3.3

2.3

6.1

7.1

7.1

9.7

13.0

10.0

7.3

Telecommunications Services

3.1

5.5

8.5

2.0

1.8

3.8

5.7

5.9

4.5

Utilities

3.1

3.8

4.5

13.1

11.4

5.6

7.2

7.9

7.1


99.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0
 

Notes:
                 

* Includes Conglomerates, Miscellaneous and Transportation industries.
         

Telecommunications Services consisted of only AT&T from 1970-1985.
         

Data as of 12/31 of each year listed.
               

GICS sector make-ups started with 1995 data.
               

Sector with largest weighting
                 

                 

Sector Delta
                 


2005/00

2000/95

1995/90

1990/85

1985/80

1980/75

1975/70

1970
 

Consumer Discretionary

10.63%

-20.76%

28.42%

-19.20%

71.23%

-17.98%

-28.80%

na
 

Consumer Staples

31.55%

-36.71%

-21.93%

31.20%

43.68%

-22.32%

8.74%

na
 

Energy

32.96%

-28.09%

-30.22%

12.93%

-58.87%

69.88%

5.73%

na
 

Financials

16.42%

32.02%

82.45%

2.86%

40.00%

8.70%

-4.17%

na
 

Health Care

-17.69%

32.74%

5.03%

49.28%

-13.75%

15.94%

43.75%

na
 

Industrials*

9.66%

-16.31%

6.13%

-17.36%

-4.00%

-1.32%

-8.43%

na
 

Information Technology

-28.16%

126.11%

6.69%

-40.54%

70.11%

-18.69%

-6.96%

na
 

Materials

41.42%

-62.03%

-14.75%

0.00%

-26.80%

-25.38%

30.00%

na
 

Telecommunications Services

-44.16%

-35.96%

326.48%

11.11%

-52.63%

-33.33%

-3.39%

na
 

Utilities

-18.90%

-16.46%

-65.41%

14.91%

103.57%

-22.22%

-8.86%

na