Year-to-date returns suggest investors have learned not to ‘Tiptoe thru’ the tulips’ after all

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Allan Lane, Algo-Chain

What is it about collecting that forces someone to want everything on a list once they have engaged with their first item of that kind? One needs to only think of either record collectors or train spotters to know this habit can get out of control. Oddly enough this line of thinking also applies to investing - once you have traded one US Equity Sector ETF, then one’s inner voice compels you to keep looking at all of them. 

I guess my own addiction dates way back to that time in the summer of 1975 when I first discovered the record stall outside of Cheapo, Cheapo Records in Rupert Street, located in London’s Soho district – possibly London’s most famous record shop, when I bought my first copy of a record by Martha Reeves on Gordy, the US label that the founder of Motown Records had launched. By the time I had gotten home I was stricken, not only was I going to track down every record by that singer, but I would aim to collect every 45 on that label – the rest they say is history. 

Fortunately, there are far fewer stocks in the S&P 500 and even fewer sectors to obsess about, yet it is well known that it is actually very hard for an active manager to consistently outperform the index. From the vantage point of the protagonists, all one needs to do is to select some or all of the stocks in the upper half of the performance table and job done.  

Given the record levels of volatility that have lapped the shores of all investors recently, one almost has the perfect laboratory just by studying the outcome since the start of the year. While the main S&P 500 itself waxed and waned during that time, what about Healthcare or the Energy sector? As key parts of the US economy, how well have they performed and was that pattern shown on a global basis? 

S&P US Sector ETFs

Source: Algo-Chain & IHS Markit 

As is often the case, the performance of a handful of ETFs can tell the story as well as the expert opinion maker on CNBC or Bloomberg TV. Both State Street and BlackRock, with their SPDR and iShares range of sector ETFs, have exactly what we are looking for. In the case of SPDR, they have a suite of 10 Equity ETFs that track MSCI’s World Sector Index series, and iShares likewise has a suite of 10 Equity ETFs which track S&P’s US Equity Sectors. 

As we look at the table above, the year-to-date (YTD) returns for the US Equity sectors (up to 12 May) has been very pronounced, and dare I say it very predictably. The Technology sector is now up 2 per cent YTD in direct contrast to the Energy sector which is down 37 per cent. In a world where over two billion people have been forced to work from home and thus not driving – I guess this all makes sense, as does the realisation that Healthcare is also proving to be one of the top performing sectors. 

The fairly recent re-classification of the GICS sectors that now sees the inclusion of a Communication sector shows the good judgement of that move which takes the number three slot in the league table with a passing nod to the ubiquitous hold that Google’s offshoot Alphabet and Facebook have on our daily lives today. There are, of course, other less obvious outcomes – why has the Utilities sector not performed as well as one might have expected? 

With a number of these firms being very much a US success story, it is interesting to study a league of YTD returns for each of those sectors on a global basis. Notwithstanding the fact that currently the US as a country accounts for a 63 per cent weighting in MSCI’s World Index it is quite compelling to see that with the exception of the Consumer Staples and Consumer Discretionary sectors (which swap positions in the tables), the ordering of the 10 sectors is exactly the same globally as it is in the US. 

With self interest at play, I do wonder how well the Financial sector will fare, in a future that has seen many countries issue national debt in the realm of GBP250 billion or more? What about the Energy sector? Will concerns around global warming finally put an end to a number of fossil-based businesses that were until recently deemed viable? While it is still early days, one does suspect we are living through what will in time be seen as seismic changes to the world’s economy. 

Superficial as this analysis might seem, the key takeaway must surely be that investors’ behaviour and reactions seem consistent, which provides one of the rare moments when rational thought seems to be in charge. Given the widely held view that most stock market bubbles are associated with the manic behaviour of investors, maybe they have learnt not to ‘Tiptoe thru’ the tulips’ after all, as they no longer want to own every tulip bulb in the collection. 

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