Although the broad market measure S&P500 is now up 83% from the Covid-19 3/23/20 low, there are large performance discrepancies between sector, broad market, and subsector relative performance. In this report, TPA examines the recovery and drills down to see which parts of the market are on solid footing, which may be due to outperform, and which may be overbought and vulnerable.
The table below looks at the relative performance of U.S. Sectors, Broad market Categories, and 110 U.S. Subsectors by examining the Covid-19 decline (2/19/20 to 3/23/20), the recovery since the March 2020 low, and 2021 YTD performance. TPA sorts each group by the ratio of the recovery performance divided by the Covid-19 decline.
The sector winners and losers stand in stark contrast. While TPA’s BIGTECH Index (top 8 stocks in the Nasdaq 100) and the S&P1500 Consumer Discretionary Index are up 109% and 105% since the 3/23/20 low, the S&P1500 Utility and Consumer Staples Indexes are up only 44% and 43% in the same time- period. Although some of the differences for Staples and Consumer Discretionary can be found in the performance differences of the Covid-19 declines from 2/19/20 to 3/23/20, other factors weighed and continue to weigh on underperforming sectors. A huge rise in yields (chart below) has made Utilities less attractive to yield-conscious investors. REITs, which are only up 62% since 3/23/20 even after getting decimated from 2/19/20 to 3/23/20, have been hit by rising rates and a huge demographic shift away from cities and toward remote work. The demographic patterns caused by Covid-19 may be permanent and mean less demand for urban apartments and office space.
BIGTECH was a winner before Covid-19, but the trend toward the use of technology went to warp speed with social distancing. In addition, consumers who were stuck at home and still had jobs decided to upgrade their living space and spend money that they would have spent on going out and vacations. Consumer Discretionary items have been and will be in great demand. The S&P1500 Materials Index is up 110% since 3/23/20. First, the shipping and shutdown issues associated with Covid-19 created shortages, which drove commodity prices higher and now the recovery and the possibility of infrastructure spending will keep demand strong.
The Russell 2000, 2000 Growth and 2000 Value were hammered during the Covid-19 decline. They were down 40%, 38%, and 43%, respectively, compared to the S&P500 which dropped only 33%. TPA has told clients repeatedly that history shows us that small Cap is the place to be when rates rise. The small-cap categories were up 123%, 119%, and 124%, respectively, in the recovery since 3/23/20; far outpacing the S&P500, which was up only 83% in that timeframe.
The largest sector weighting in both the Russell 1000 Value and the Russell 2000 Value is Financials, but small-cap Financials are much more sensitive to interest rates. Much of the difference between the recovery performance of Large Cap Value (+81%) and Small Cap Value (+124%) is due to the yield benefit to small-cap Financials.
The table below looks at 100 U.S. subsectors by using the performance of the S&P1500 Indexes. There are huge performance discrepancies between the recovery winners and losers among subsectors. While Home Furniture, SEMIs, and Retail Electronics are up 483%, 230%, and 219%, respectively, since the 3/23/20 low, Telecomm, Biotech, Gas Utilities, and Office REITs are up only 13%, 27%, 36%, and 40% since the March 2020 low.
Sorted by the ratio of Recovery Performance/Covid-19 decline, the top 10 subsectors are:
COMPUTER & ELECTRONICS RETAIL
AIRFREIGHT & LOGISTICS
ELECTRICAL EQUIP. & INSTRUMENTS
These subsectors’ outperformance has been driven by some of the factors already mentioned; much of it a factor of the pandemic.
The worst 10 subsectors have been:
Much of these subsectors’ underperformance was a result of the Pandemic and/or rising rates.
If the performance patterns of 2/19/20 to 4/8/21 were due in large part to the forces put in place by Covid-19 and rising interest rates, then the future relative performance of Sectors, Broad Market Categories, and Subsectors may also depend on these 2 factors. TPA sees 3 events as having an impact of future performance: (1) a slow-down in stay-at-home spending, (2) a pick-up in away from home spending, and (3) rates topping out at 2%.
Below TPA shows what the effect of each of the preceding 3 events may have on relative performance:
1. Stay-at-home spending slow-down & Away from home spending pick-up
Ø HEALTHCARE SERVICES
Ø HEALTHCARE DISTRIBUTORS
Ø HEALTHCARE EQUIPMENT
Ø APPAREL RETAIL
Ø APPAREL & ACCESSORIES
Ø HOME FURNITURE
Ø COMPUTER & ELECTRONICS RETAIL
Ø HOUSEHOLD APPLIANCES
Ø HOME FURNISHINGS
2. Rates may top out at 2%
Ø INTERNATIONAL TELEPHONE
Ø GAS UTILITIES
Ø ELECTRIC UTILITIES
Ø RESIDENTIAL REITS
Ø MORTGAGE REITS
Ø INVESTMENT BANKS
Ø REGIONAL BANKS
Ø LIFE INSURANCE