(Source: Momentum Global Investment Management)
07 June 2020
Passive Aggressive 📈
This chart shows the weighting of each sector within the S&P 500 index over the past 25 years and how the sectoral structure of the index has shifted over time. The S&P 500 index is based on the top 500 US stocks by market capitalisation.
One of the most important recent trends in US equities has been the outperformance of technology stocks, and the share price growth has meant the sector now makes up over 25% of the US market (last month we explained the combined market capitalisation of Apple and Microsoft recently exceeded the combined total of a broad UK equity market index). The only times in recent history that the S&P 500 has been so dominated by one sector have been in 2006/7 before the financial crisis (when Financials were over 22%) and in 2000 before the dot com crash (when the Technology sector was over 33%).
Readers will observe a spike up in the Communications Services sector weighting in 2018 (previously called Telecommunications) and a spike down in the Technology and Consumer Discretionary sectors. As an example, both Alphabet (Google) and Facebook were reclassified at this time and were moved from Technology to Communication Services. Considering these to be Technology stocks still, or rather using ‘old’ classifications, would mean an even higher weighting to the sector today.
Why this chart is relevant
With the S&P 500 so heavily exposed to one sector today, it is worth remembering what occurred when we previously observed such levels of concentration (preceding the dot com crash and the financial crisis as mentioned above). In both instances the sector outperformance proved temporary and returns fell back towards the mean.
Traditional market capitalisation weighted passive investment approaches will always bias investors towards the largest sectors and stocks that have previously outperformed. History tells us these trends do not last forever. There are always opportunities beneath these headlines grabbers which active managers can exploit.
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