Bespoke Investment Group
Seeking Alpha, October 15, 2008
With the extreme action in the markets lately, we thought it would be good to update our charts on historical S&P 500 sector weightings. In the first table below, we highlight each sector's representation in the S&P 500 (in percentage terms) since 1990. For each year, weightings are color coded from red (smallest) to green (largest), with the biggest sector highlighted in white font. For 2008, we provide weightings as they stood on July 15th (a short-term market bottom and the top in commodities), September 19th (the temporary peak following the initial TARP announcement and "No Short" rule), and yesterday.
As we've noted in the past, sector weightings go through cycles, and looking at where representation stands versus its historical average can offer insight into the long-term overbought and oversold levels of a sector. It also offers a good glimpse of the economic trends of the country.
As you'll see in the table below, the consumer sectors and industrials made up the majority of the market in the early 90s, while financials and technology were two of the smallest sectors. That changed quickly in the mid-90s, and financials and technology have been either the first or second largest sectors since 1996.
Unsurprisingly, the energy sector rose significantly over the last few years, and for a brief period this year, it was the second biggest behind technology. The doubling of its weight from '04 to '08 and the big movement above its historical average were clear signs that the energy sector had become overheated. Since July, the energy sector's weight has fallen from 15.3% down to 12.8%, and it now ranks behind financials, technology, and health care.
The trend this year for the financial sector's weighting has also been interesting. Back in July, the problems in the equity market were still largely contained to financials, and its sector weighting fell sharply from 17.6% at the end of '07 to 12.9% on 7/15. Since 7/15, however, the credit crisis has hit every sector hard, and financials have outperformed many of them. This has resulted in the financial sector's weighting actually increasing back up to 16%, once again making it the biggest sector in the S&P 500.
As our economy changes over the next few years due to everything that has happened this year, it will be interesting to see how sector weightings change. Will the consumer sectors and industrials stage a comeback? Will technology move into first place and widen the gap again like it did in the late 90s? Will financials no longer be the largest sector of our economy?
Below we highlight individual sector weighting charts over time. The red line represents the average weighting for each sector since 1990.As shown, financials and technology are currently resting just above their long-term averages, while industrials and utilities are resting just below. Health care has recently moved quite a bit above its average, and energy remains well above its average but continues to head lower. The materials sector has tried to move back up towards its long-term average over the last few years, but the recent selloff in the sector has halted the trend. And consumer staples has moved above its long-term average this year, while consumer discretionary is at its lowest weighting since 1990. The consumer discretionary sector probably stands out the most as the one due for a big rally.
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