Massive Sector Performance Spreads

There’s no questioning that the equity market has been extremely volatile this year. So far in 2022, the S&P 500 has averaged an absolute daily move of 121 basis points (bps). Although the broader index has been incredibly weak over the last 100 trading days (down 17.1%), performance among individual sectors has diverged widely, as Energy has gained 50.7% while the Communication Services sector has declined 32.0%. The 82.7 percentage point performance spread between the two sectors is one of the highest on record. Only July of 2009 and March of 2000 saw higher readings.

Since 1990, there have only been six times in which the best-worst 100-day performance spread crossed above 70 ppts for the first time in at least 50 trading days. This tends to occur amidst a volatile market environment. In the late 90’s, investors flooded into technology stocks while dumping ‘traditional’ stocks, which led to the Technology sector outperforming Energy by 70.2 percentage points in a 100-trading day span ending on 1/28/1999. When the dot-com bubble began to burst, the inverse occurred, and Materials outperformed Technology by 71.3% in the 100 trading days ending 3/9/2001. Coming out of the Global Financial Crisis, the Financials sector roared off of a depressed base, leading to outperformance against the Communication Services sector of 89.7 ppts. In late February of 2021, the Energy sector began to bounce back after the demand shock in the industry began to abate, while the Utilities sector remained relatively weak, leading to a 100-day performance spread of 71.1 ppts. This year, the sky-rocketing price of oil has propelled energy stocks higher while the Communication Services sector has been hampered by concerns that a peak demand environment was reached in 2020 and 2021 while valuation multiples have simultaneously contracted (largely due to the Fed’s hawkish pivot) pushing the 100-trading day performance spread out to 82.7 ppts.

As investors, we must remain forward-looking. So, what typically happens after dramatic performance spreads are reached between the best and worst sectors? It’s a small sample size, but based on the previous five occurrences, investors should consider rotating out of the best performing sector (which in this case would be Energy) after the spread hits 70 percentage points and move into the worst performing sector (Communication Services).

Three months after these occurrences, the worst-performing sector over the prior 100 trading days has booked a median gain of 12.1%, which is nine ppts better than that of the best performing sector.  Six months later, the median performance of the worst-performing sector in the initial 100 trading days outperformed the best performing sector by 15.5 ppts. Interestingly, twelve months later, the best performing sector in the initial 100 trading days regained the lead over the worst-performing sector outperforming on a median basis by a margin of 17.2% to 8.3%.  In terms of consistency, three and six months later, the previously worst performing sector outperformed the best performing sector three out of five times, but a year later, the previously best performing sector outperformed the worst-performing sector four out of five times.  Click here to become a Bespoke premium member today!

S&P 500 forward performance... Can energy keep it up?

Over 40% of S&P 500 Stocks Below Pre-COVID Highs

The world changed dramatically with the onslaught of the COVID pandemic in early 2020. Businesses were forced to digitize, consumers saved at historic rates, the Federal Government and Federal Reserve flooded the economy with cash, new hobbies were picked up faster than a dropped hundred dollar bill, and consumers emerged from the lockdowns financially stronger than ever. Long story short, COVID appeared to permanently alter the ways in which consumers and businesses interact, and companies that stood to benefit from the new way of life saw their stocks surge while the old-economy stalwarts were crushed. That was then.

This is now. As the economy has emerged from COVID, the cost of inputs has skyrocketed, real buying power has diminished, supply chains have become strained, and geopolitical tensions are hot.  Not only that, but whereas the rate of fiscal and monetary stimulus was stronger than ever during the pandemic, the headwind from their removal is as intense as it gets.

Given the shifts, a number of stocks that originally surged in the COVID world have been hit hard in the post-Covid environment, and some of the biggest COVID losers during the lockdowns have turned into market leaders.  As things currently stand, 40.6% of S&P 500 members are below their pre-COVID highs (closing high price from the start of 2019 through the end of February 2020), even as the index is up 18.0% from its pre-COVID closing high on 2/19/20. Besides the fact that four out of every ten S&P 500 stocks are below their pre-COVID highs, 8.1% of the index members are within 5% of their pre-COVID high and another 7.1% are within 10% of their pre-COVID highs.

At the sector level, three sectors – Communication Services, Real Estate, and Utilities- have more than half of their components trading below their pre-COVID highs.  In addition to those three sectors, in both the Consumer Discretionary and Financials sectors, more than 40% of components are below their pre-COVID highs, and another 10% of each sector’s components are within 10% of those former highs. At the other end of the spectrum, the original ‘losers’ from COVID like Energy and Materials have fewer than a quarter of their components trading below their pre-COVID highs. While it seems some days like COVID will never go away, the rallies that a large number of stocks experienced are now nothing more than memories.   Click here to view Bespoke’s premium membership options.

S&P 500 VS Pre-COVID Highs

Stocks vs pre COVID levels