Which Stock Sectors Have Done The Best In First Half 2016?

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Includes: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
by: Daryl Montgomery

Summary

Investors should concentrate their holdings in top performing sectors and avoid poorly performing ones.

Two of the top three sectors in the first half of 2016 are defensive sectors.

One sector is performing much worse than all the others.

Sector performance in the first half of 2016 has a bearish tinge.

As the first half of 2016 draws to a close, the Dow and S&P 500 are up slightly for the year. Investors who've pursued a buy and hold strategy have gotten dividends and a little more. Of course, not all sectors of the S&P 500 performed equally well; some did much better than the average and some did much worse. To increase returns, investors should buy the leading groups (or buy stocks within them) and avoid the laggard groups. The relative returns of various stock sectors can alert investors as to whether the market is bullish or bearish.

Of the nine sectors, the best three performers in the first half of 2016 are: Utilities (NYSEARCA:XLU), Energy (NYSEARCA:XLE) and Consumer Staples (NYSEARCA:XLP). Two other groups did better than the S&P, but by not as much: Materials (NYSEARCA:XLB) and Industrials (NYSEARCA:XLI). Consumer Staples and Materials were a close third and fourth, though. Industrials were actually a top three performer in the first quarter, but since then its performance has more closely mirrored the S&P's.

Utilities, a safe haven group that does well in bear markets, have been in a leadership position consistently throughout the year. It was the top performing sector at the end of the first quarter as well as at the end second quarter. Consumer Staples are a group of stocks that do well in bear markets. The sector ranked second in the first quarter and now ranks third. Energy was even with the S&P 500 at the end of Q1, but then moved ahead and was briefly number one in late April.

The chart below shows the three best sectors and the S&P 500 with their percentage increase since the beginning of 2016. The S&P 500 is the black line, Consumer Staples is the red line, Energy is the blue line, and the Utilities sector is the yellow line.

Top Performing U.S. Stock Sectors in the First Half of 2016

Of the remaining nine sectors, only one has significantly underperformed the S&P 500 - Financials (NYSEARCA:XLF). The others: Technology (NYSEARCA:XLK), Consumer Discretionary (NYSEARCA:XLY) and Healthcare (NYSEARCA:XLV) have done only slightly worse and are essentially moving with the index. Financials were the worst performing group in the first quarter as well. Their behavior so far in 2016 is typical of bear markets. In the chart below, Financials are represented by the yellow line and the S&P 500 is the black line.

Financial Sector Is Worst Performer in First Half of 2016

Investors should, of course, avoid the sectors doing badly and buy the ones doing the best. At the end of the first half of 2016, the best choices are XLU, XLE and XLP. The rankings change over time, though, so some adjustment should be made occasionally - once a month or even once a quarter is a good choice. When a sector goes from underperforming to outperforming the S&P 500 as oil did in early March 2016, it can be bought. When a sector decisively falls out of the top three, it should be sold, and whichever sector replaced it should be bought in its place.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.