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Many investors believe that diversification will protect them from large drops in market value. On the contrary, different securities and asset classes tend to fall together during precipitous drops. Spo, which sectors are most resistant to down markets?

To answer this question, stocks were screened and sorted based on their performances over the week-long downturn that lasted through August 9th, 2011*. Over the course of this week the S&P 500 index dropped over 13.3% while the mean drop for a broader sample of 4541 equities was 10.1%. This provides an opportunity to observe sector differences during extreme market drops. **

Sector

Mean Gain (Loss)

Mean Beta

Mean Market Cap

($ Millions)

Utilities

-6.7%

0.72

5388

Financial

-7.6%

1.17

4284

Conglomerates

-8.8%

1.09

17400

Consumer Goods

-9.6%

1.37

6660

Services

-9.7%

1.39

3341

All Sectors

-10.1%

1.30

5085

Technology

-10.6%

1.36

5388

Healthcare

-11.1%

1.19

3761

Industrial Goods

-11.5%

1.45

3345

Basic Materials

-13.5%

1.38

9375

Sector performance is not perfectly explained by market cap or beta differences. Beta, a measure of a stock’s past co-movement with the market, served to rank most sector performance. Notable exceptions included healthcare, which dropped more than other sectors with a higher beta, and the consumer goods and services sectors, which should have dropped more based on beta. Oddly, conglomerates fell more than financials despite having a lower beta.

Conventional wisdom is challenged by these results. The healthcare sector was not the safe haven it is touted as, financials were not as dangerous as are often claimed, and basic materials are not rock-solid.

Both beta and this recent experience reveal that the utilities sector has been resistant to extreme market movements. Further investigation into utilities as a component in portfolio construction is warranted.

*Stocks with volumes under 5000 were excluded from the screen, since low liquidity makes them hard to trade. ETFs and other funds were also excluded.

**Mean sector performance and mean beta were calculated from an equal-weighted average of stocks in that sector.

Source: The Effect of the Market Downturn on Different Sectors: Utilities Remain Safest Bet