Recent Sector Performance Provides Some Guidance For Investors

The recent roughly 6% pull-back in the Dow and 7.5% for the S&P 500 was a shock to some.  However, if we dig a little deeper, we find that several of the sectors within the market and economy have experienced much more sizable drops.  In the table below, we can see all 10 sectors representing the U.S. economy and stock market.  As can be seen, the utilities sector, one of the key contributors to the market’s overall advance from the November 2012 lows, has fallen more than 13% from its recent high, and during the same time the overall market fell by about 7.5%, or little more than half as much.  In fact, only three sectors fell by less than the overall market, with seven sectors experiencing more significant drops.  Defensive sectors, such as Utilities, Consumer Staples, and Healthcare, all of which have been leading the market’s advance, suffered more substantial declines than the overall market.  It is clear that leadership for the market is shifting, and, at the same time, we are experiencing a correction.  The magnitude of that correction is still yet to be determined.  My expectation is that we will see at least a 10% fall, and very likely could see a 15% to 20% drop, or more, before the correction has run its course.

What to do after the correction?

My belief is that leadership will shift to the high-growth sectors of the economy, once this correction ends.  These sectors include technology, industrials, and consumer discretionary.  Energy, communications, and materials could also participate, outperforming the overall market and the more defensive sectors, which should under-perform, although the underlying commodity prices for energy and materials will always be an added variable that cannot be overlooked.

Investors currently raising cash should look to the high-growth sectors for reinvestment opportunities, once the correction has run its course.  This will be my strategy as well.

Sector Performance
Sector Symbol (ETF) Recent High (date) Recent High Recent Low (date) Recent Low % change
Utilities XLU 4/30/2013 $41.44 6/24/2013 $35.98 -13.18%
Communications IYZ 5/21/2013 $27.55 6/24/2013 $24.76 -10.13%
Energy XLE 5/22/2013 $83.95 6/24/2013 $76.02 -9.45%
Materials XLB 5/22/2013 $41.61 6/24/2013 $37.78 -9.20%
Financials XLF 5/22/2013 $20.35 6/24/2013 $18.58 -8.70%
Consumer Staples XLP 5/15/2013 $42.20 6/24/2013 $38.87 -7.89%
Healthcare XLV 5/22/2013 $50.40 6/24/2013 $46.45 -7.84%
Industrials XLI 5/22/2013 $44.70 6/24/2013 $41.37 -7.45%
Technology XLK 5/20/2013 $32.31 6/24/2013 $29.94 -7.34%
Consumer Discr. XLY 5/22/2013 $58.09 6/24/2013 $53.96 -7.11%
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