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Blog Posts — February 12, 2018

As the US Market Gyrates Not All Sectors Suffer Equally

by Diana R. Baechle, PhD

Analysis Date: February 9, 2018

All Russell 1000 sectors recorded significant losses since the US market started its decline on Friday, February 2. The largest six-day drop was reported by Energy (-12%), followed by Telecommunications (-8%) and Financials (-7.6%). Except for Real Estate and Utilities, all other sectors had a day of respite on Tuesday, February 6, posting gains for the day. While Consumer Staples, Financials, Industrials and Telecommunications continued to rise the following day, Thursday was another dark day for all sectors. US stocks rebounded last Friday, pushing up all sectors except Energy, which remained on the sidelines. In the end, Utilities and Real Estate weathered these six days the best—although down, the magnitude of their 6-day cumulative returns was relatively low (-3% and -5%, respectively).

The broad-market Russell 1000 gave up its gains for the year, and so did all of its sectors, except for Consumer Discretionary, which still had slightly positive year-to-date cumulative returns as of Friday, February 9. The bottom five year-to-date performers were skewed toward higher-yielding sectors: Real Estate (-9%), Energy (-8%), Utilities (-7.6%), Telecommunications (-5.5%) and Materials (-4%), as investors likely swapped them out in search of yield and/or safety in bonds.

Real Estate and Utilities have recorded negative returns in 2018, with the recent market swoon exacerbating the declines. Telecommunications has been in negative territory for most of the year, rose to +2.1% on February 1, and then tumbled. Materials’ year-to-date cumulative return rose to 5.7% by January 26, before trending downward. Energy reached its peak of 7.8% on January 22 before its collapse.

Risk in most sectors has been on the rise since the beginning of the year, as measured by Axioma’s medium-term fundamental US4 model. Only Energy and Telecommunication, the riskiest sectors in the index, saw their risk decline briefly before shooting up more recently. Energy and Telecommunications were by far the riskiest sectors in 2017 and held on to their titles into this year. Consumer Staples and Consumer Discretionary started 2018 as the least risky sectors, and also kept their status.

Health Care, Information Technology, and Materials recorded the largest year-to-date increases in medium-horizon risk, of 314, 306, and 292 basis points, respectively.

Portfolio managers should take note that sector bets made a few weeks ago may now contribute very different levels of risk to their portfolios. While many sectors’ contributions to Russell 1000 risk either rose or remained flat over the past six days, Information Technology, Financials, and Consumer Discretionary saw their contributions shrink. It is a zero-sum game, but more than half of the sectors in the index had their contributions to risk lower than their weights in the index last Friday. Energy, Financials, Industrials, Information Technology, and Materials were the only sectors with risk contributions above their weights this past Friday.