The biggest reason only 2 of the market’s 12 sectors have made any progress at all YTD is extremely simple. Gigantic stocks become bigger targets . . . and when they’re overrepresented in a portfolio, their downfall creates a lot of collateral damage.
Right now the nine biggest stocks on Wall Street have dropped an average of 17% apiece in the last four months. That’s a drag on everyone when they account for approximately a quarter of the entire S&P 500 and all size-weighted funds that track it.
And when you drill down to the sector level, the shadow of these stocks gets even gloomier. It’s not just about technology any more. The problem has spread well beyond Silicon Valley . . . and until a new balance emerges, sector-based strategy just doesn’t make sense.
Start with the sectors that are working. Energy is obviously a win as long as oil prices remain high and Big Oil resists the perennial urge to go deep in debt in order to develop new fields.
The utilities are as defensive as it gets, even though their earnings are growing so slowly that they’re actually falling behind when you adjust for inflation. Defense is worth a premium in this market environment.
If you’re willing to stretch, add the consumer staples stocks, which are right around unchanged YTD. Some, like Coca-Cola (KO) and Philip Morris (PM) are doing relatively well. Others, like Costco (COST) and Procter & Gamble (PG), aren’t.
Either way, these sectors account for at most 15% of the broad market. They’re a fringe, practically a sideshow in the context of the overall S&P 500.
And yet they’re the center of most Americans’ lives. We eat their food, drink their beverages, shop in their stores. They keep our gas tanks full and our homes lit up.
Moreover, while the key names in these sectors are famous across the world, even the biggest aren’t even half the size of Tesla (TSLA) right now. The essential role they play in the global economy simply doesn’t translate to the amount of investor attention or assets circulating around the hottest names elsewhere.
Big Soda, Big Oil, Big Food and Big Box Retail also all inhabit an ecosystem of competitors and colleagues that Silicon Valley’s giants have largely discarded. ExxonMobil (XOM) and Chevron (CVX), for example, dominate the energy sector without striving to render one another’s operations obsolete.
Pepsi (PEP) and Coke (KO) have learned to coexist. One or the other will gain or lose a little market share from season to season, but on the whole they’ve achieved a kind of equilibrium. They’re mature. And that means they aren’t likely to grow a lot from their current level.
Then you have the sectors where a more disruptive strain of giant dominates. Apple (AAPL) and Microsoft (MSFT) are the biggest that are still classified as true technology companies, but the others have each been reclassified in recent years.
Unfortunately, there just isn’t enough money circulating through the traditional consumer sector to keep up with Amazon (AMZN) and Tesla (TSLA). Those two stocks now account for about half of their sector . . . and their sad performance YTD has been a cloud hanging over everything else, from Home Depot (HD) on down.
Likewise, Alphabet (GOOG) and Meta (FB) are now officially communications companies, and their own declines this year have been a drag on the movie studios, phone carriers and cable operators around them.
From this point of view, it’s no wonder that these three sectors can’t overcome the rot at the top. Each of these trillion-dollar companies are still dynamic, disruptive and interesting . . . but the stocks have grown to the point where the rest of us can’t get out of their way when they stumble.
I’m increasingly reminded of the bear market of late 2018. Apple had a bad quarter. The rest of Wall Street was forced to feel the pain. And that was four years ago, before the gap between the biggest stocks and everything else was quite so extreme.
Today, if Apple has a bad quarter, the odds are good that several of its trillion-dollar peers will also move in the same direction. And when the three sectors they dominate account for 45% of the entire market, that’s a problem for everyone.
Not even the financials are that concentrated. Yes, you have Warren Buffett’s Berkshire Hathaway (BRK) at the top of the sector food chain, but it’s at best as big as Tesla. Each of the “too big to fail” banks from JP Morgan (JPM) on down has a smaller impact on the market as a whole than Meta taken in isolation.
Collectively, all the financials put together have roughly the same impact on index funds as Apple and Microsoft. Two stocks . . . against thousands. Healthcare is a similar story.
There’s no easy way out of this situation, either. If you don’t want to live in the giants’ shadows, you simply have to avoid their entire sectors. Don’t invest there.
Or rethink your entire approach to what “sectors” are and how they interact within the economy. Maybe you don’t think Amazon really plays in the same space as more traditional retailers . . . in that scenario, if you don’t like Amazon, simply buy your favorite shopping chains and restaurants.
If you don’t like the giants, head to the fringes. Don’t buy “the next Apple.” Buy companies that do entirely different things. Buy energy. Buy utilities. Buy food.
Maybe it’s time for a renaissance in the tangible world, where commodity math applies and nothing is “virtual.” These companies aren’t going anywhere fast. They stopped making transformational innovations a long time ago.
They’re “mature.” But they still know how to keep cash flowing throughout the economic cycle. If that notion appeals to you, there are plenty of stocks circulating around the fringes of Wall Street to keep you busy for the rest of your life.