Sectors Tell an Important Story

By Matthew Hougan

Just look at the changes Jim Wiandt outlined between the sector weights in the S&P 500 from 2005 to June 30, 2008.  Here's the table:

	June 2008	2005
Consumer Discretionary	7.88	10.7
Consumer Staples	10.81	9.5
Energy	16.25	9.3
Financials	14.28	21.3
Health Care	11.94	13.4
Industrials	11.15	11.3
Information Technology	16.46	15.1
Materials	3.91	3.0
Telecommunications	3.34	3.0
Utilities	3.99	3.4

It tells the entire story of our economy over the past 18 months.  For starters, you have the massive shift of resources into the energy patch, which nearly doubled its share of the S&P 500 over 18 months, from 9.3% to 16.25%. That brings it back to the levels last seen in the 1980s, when it represented 28.2% of the economy, before efficiency, low prices and limited exploration budgets shrank the sector to a shell of its formal self.

Then, you have the debacle in Financials, which have dropped a third of their value from 21.3% of the S&P 500 to just 14.28%.  With no bottom yet in sight, I might add.

Meanwhile, you have Consumer Discretionary tumbling, presumably because U.S. citizens are too broke paying for gas and heating oil to buy anything fun. And you've got the darkhorse candidate --- Information Technology --- emerging as the largest and most important sector of the U.S. economy.

It's just a beautiful table.

I'm still not clear how these would filter down into an asset allocation model -- I'd love to see a few examples -- but I do think sectors are hugely telling in the market.

One closing note: Is anyone else starting to get that icky feeling similar to the run-up to the Bear Stearns (BSC) implosion?  It seems like this financial crisis keeps coming in waves. Freddie (FRE) and Fannie (FNM) on the ropes; Lehman Brothers (LEH) stumbling; record foreclosures; talk of Bank of America (BAC) needing to raise $51 billion in capital...

Yeck.

Comments

[quetzalcoatl]

George W. Bush will be leaving office early next year. That is the only positive item on the horizon. Whoever replaces him will be an improvement.