The COVID-19-related decline may have affected all sectors of the market, but traditional defensive sectors like consumer staples, telecommunication services and utilities made out better than others.
Looking at sector-level performance of U.S. stocks, we can see that issues separate from the outbreak have played a role in the recent volatility.
The healthcare sector also managed to keep it together, relatively speaking. Its performance began to decline in late January, which may be attributable to growing concerns about the coronavirus. The sector also enjoyed a big resurgence in early March following U.S. presidential primary victories for former Vice President Joe Biden, which all-but-eliminated Senator Bernie Sanders (and his “Medicare for All” campaign promise) from the Democratic presidential race.
Information technology has seen only a moderate deterioration through mid-March after being the best-performing sector before the downturn.
On the other hand, cyclical sectors—which include consumer discretionary, materials, and industrials—have taken a sharper turn. In particular, the materials sector has been straggling since January 2018, after U.S. trade policy tightened.
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Financials have suffered since shortly after the New Year, having peaked in late 2019 amid rising interest rates. Higher interest rates are typically advantageous for companies in the financial sector, as they may increase companies’ net interest margins. But, since the New Year began, long-term rates have sank to historic lows.
The U.S. energy sector has been flailing since mid-2014. The breakdown of OPEC+ (the Organization of the Petroleum Exporting Countries—plus Russia) in early March 2020 caused additional anxiety for investors. After Russia refused to go along with Saudi Arabia’s plans for a shared production cut—which was meant to stabilize oil prices in the face of declining demand—Saudi Arabia ramped up oil production. This caused the largest one-day oil-price crash since 1991. It also appeared to be an attempt to put high-cost producers—most of which are in the U.S.—out of business.
This divergence in performance between sectors is a great reminder of why diversification is still the best strategy for a long-term investor. A portfolio that invests in companies across many sectors is likely to fare better than one that is more heavily-weighted in a particular direction.
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