S&P 500 Sector Leadership Changes, 1990-2009: Bubbles and Reverse Bubbles

If we look at the sector leadership by percentage share in the S&P 500 from 1990 to 2009, we can’t ignore the dramatic rise of the financial and technology sectors in last twenty years. From 1990 to 1994, Consumer Staples, Consumer Discretionary and Industrials were the leading sectors but in the later half of nineties, Technology almost dominated the S&P 500 with a 30% share. The financial sector also saw a similar rise while the Consumer Staples and Materials sectors lagged behind as shown in the table below:

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However after the technology bubble popped in 2000-01, the Financial sector took over. Again, a single sector grew to more than 20% of the S&P 500 and it resulted in another bubble - in the financial sector this time.

But if we look at the volatility of the sectors, the energy sector was the most volatile sector from 2001 to 2009. Even after a huge drop in oil prices this year after last year's run up and respective market cap loss of oil companies, the Energy sector's share in the index is almost twice what it was in the beginning of the decade as shown in table below:

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After looking at this data, you would wonder whether there was a bubble inside a bubble and the Energy sector bubble still exists after the financial sector bubble popped last year. It may also be the case that with the emergence of new world economies, energy needs have changed drastically worldwide and this sector’s higher weight is justified in the current environment.

Here are some of the other observations from this data:

There is not much change or visible trends at a high level in Industrials, Healthcare, combined Consumer Staples and Discretionary and the Utilities sector shares overall.

The Material sector's percentage share is increasing with commodities becoming an essential part of portfolios and increasing demand of for commodities from developing economies. The Telecom sector is severely depressed relative to its 1990s levels. Telecom companies actually deliver more services today including voice, video and data as compared to the nineties. The customer base of telecom services has also increased worldwide and information needs are even greater today. The glut of bandwidth that was created by the internet bubble should have already been absorbed by the additional voice and video data traveling on those big optical pipes that were put into use in the late nineties.

Looking at this data, one would wonder why then the Telecom sector is not seeing the growth the Energy and Materials sectors are seeing with the emergence of more and more developing economies where people have started utilizing the modern amenities that require these resources. The Telecom sector has gone through a lot of consolidation and companies have cut costs to the bone. But this would not explain why today's Telecom sector weight is one-third of its sector weight in the 1990. It also does not look like the Telecom sector was in a bubble in early 1990s as there is no huge drop or rise in percentage share seen but a gradual drop in the last 20 years.

The total value delivered to the economy by these companies should have increased through cost cutting and consolidation when overlaps were removed. Even if there is a lower number of telecom companies, and hence sources of market cap in the S&P 500, the values of the existing companies should actually reflect a higher contribution to economy by these companies.

One possibility is that the Telecom sector correction has been overdone over the last 20 years and company valuations have gone haywire. It could also be that local carriers in the developing countries carry most of the traffic and they are not part of the S&P 500 but then, this should actually be factored in as growth opportunities for multinational telecom companies which are part of the S&P 500. Traffic and information needs in developed countries have also grown many times over. One can argue that cable companies or media companies can deliver some of the services telecom companies have been delivering but that is true the other way around also i.e. telecom companies can provide TV and video on demand type services as well.

To me it looks like Telecom has become a 'forgotten' sector because of lower returns in the last few years and this may actually be a bubble in reverse direction that should correct itself with time.

Data Source: Bespoke Investment Group Articles, Current data in the tables is end of June 2009 data.

Disclosure: Multiple positions in S&P 500 stocks

Comments

[john s. gordon:]

industrials - we have shipped our jobs overseas, so what do you expect.
> jack

Aug 31 09:20 AM