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Spotting Trends: Sectors to Consider in a Market Downturn

Unprecedented market volatility calls for specialized, industry-specific knowledge.

The Consumer Staples, Health Care, and Software & Services sectors offer opportunities that could be beneficial in the current market downturn.


This post was written with contributions from Anqi Dong, CFA, CAIA. Anqi is a Senior Research Strategist, VP on the SPDR Americas Research Team.

Equity markets have been reeling over the social and economic impacts of COVID-19. In this period of unprecedented volatility, it is particularly important to be able to spot trends and not just simply spot overarching market shifts or dynamics. True opportunity lies in using specialized, industry-specific knowledge to capitalize on constantly evolving market events, macro trends, and other changes.

In this environment, we see three opportunities where we believe investors can benefit from long-term tactical positioning in sector-based strategies.

1. Consumer Staples: Defensive positioning in market downturns
Constant media coverage of COVID-19 has sent consumers en masse on shopping trips to stock up on food, household essentials, and personal care products to prepare for extended periods at home. These actions could benefit the revenue growth of the Consumer Staples sector this year, as well as potentially drive positive earnings surprises in the coming quarters.

The defensive qualities of the Consumer Staples sector have helped it outperform the S&P 500® Index during equity market selloffs. As shown below, the S&P 500 Consumer Staples Index has outpaced the broad market by an average of 13.8% during every bear market since 1990.

Source: FactSet, as of 3/18/2020. Past performance is not a guarantee of future results.


Related ETFs

Investors may favor Consumer Staples stocks for their noncyclical business allocation when seeking limited downside risk in their equity exposures. According to our analysis of sector performance over business cycles, Consumer Staples stocks outperformed the broader market an average of 14% during six of seven recession periods, and 4% during eight of 11 economic slowdowns.1

To add defensive positioning and build resilience for equity portfolios, consider an allocation to Consumer Staples through the Consumer Staples Select Sector SPDR Fund (XLP).

2. Health Care: Increasing demand with reduced political headwinds
Investor concerns over political headwinds, including “Medicare for All” proposed by progressive Democratic Party candidates, compressed relative forward price-to-earnings for Health Care Services companies two standard deviations below its 10-year average over the past one-year period.2

However, this political overhang is abating as the moderate candidate, former Vice President Joe Biden, emerged as the Democratic Party frontrunner after Super Tuesday. Biden’s plan of expanding the Affordable Care Act would be much less disruptive to the Health Care business model and profitability than Medicare for All and relieves pressure on industry valuations.

To combat the coronavirus pandemic, we are likely to see increasing demand and government spending on Health Care Services, including lab testing, pharmaceutical benefits, and health care facilities. While analysts have been slashing the earnings estimates of the broader market since the outbreak of COVID-19, earnings prospects in the Health Care sector and Health Care Services industry remain solid and are expected to outpace the broader market in 2020, as shown in the chart below.

Source: FactSet, as of 3/18/2020. Earnings-per-share growth estimates are based on Consensus Analyst Estimates compiled by FactSet.

To benefit from increasing demand and improved political sentiment in Health Care stocks with attractive valuations, consider the SPDR S&P Health Care Services ETF (XHS), which has a targeted exposure to the Health Care Services industry with a broad Health Care sector exposure.

3. Software & Services: Secular growth and attractive valuations
Software & Services stocks are under pressure, down by more than 30%, and underperforming the broad market by nearly 9% year to date.3 The chart below shows the relative valuations of Software & Services stocks, which are now below their 10-year medians, based on forward price-to-earnings and price-to-sales ratios.

Source: FactSet, as of 3/17/2020. Characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.

However, demand for home entertainment and education software is likely to increase as people all over the world practice social distancing and stay at home. Additionally, as more businesses adopt a remote-work strategy as part of their business continuity plans, their reliance on cloud-based infrastructure services and system software will fuel demand for cloud-based enterprise solutions.

Although the pandemic is creating a more uncertain macroeconomic environment for Software & Services companies, their strong balance sheets and high-profit margins may help cushion temporary economic shocks. The pandemic might also expedite the shift to cloud-based software solutions for many firms and send the industry growth of Software & Services companies on a growth trajectory path.

To position for the increasing demand for remote work and home entertainment software solutions, consider an allocation to Software & Services companies in the SPDR S&P Software & Services ETF (XSW).
To learn more about emerging sector investing opportunities, visit our dedicated sectors webpage.