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.
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.
1 Sector Business Cycle Analysis, Matthew Bartolini, Anqi Dong, SPDR Research, 2020. 2 FactSet, as of 3/18/2020. 3 FactSet, for the period from February 20th to March 18th 2020. The industry is represented by the S&P Software & Services Select Industry Index.
S&P 500 Index: The Index includes 500 leading U.S. companies and captures approximately 80% coverage of available market capitalization.
S&P Consumer Staples Select Sector Index: The companies included in each Select Sector Index are selected on the basis of general industry classification from a universe of companies defined by the S&P 500. The Index includes companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.
S&P Health Care Sector Index: A benchmark comprised stocks included in the S&P 500 that are classified as members of the GICS® health care sector.
S&P Health Care Services Select Industry Index: The Index represents the health care services segment of the S&P Total Market Index ("S&P TMI"). The S&P TMI is designed to track the broad U.S. equity market. The health care services segment of the S&P TMI comprises the following sub-industries: Health Care Distributors, Health Care Facilities, Health Care Services, and Managed Health Care. The Index is modified equal weighted.
S&P Software & Services Select Industry Index: The Index represents the software and services segment of the S&P TMI.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
The views expressed in this material are the views of SPDR ETFs and SSGA Funds Research Team through the period ended March, 17, 2020 and are subject to change based on market and other conditions and do not necessarily represent the views of State Street Global Advisors or any of its affiliates. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or
developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.
Diversification does not ensure a profit or guarantee against loss.
Concentrated investments in a particular sector or industry tend to be more volatile than the overall market and increases risk that events negatively affecting such sectors or industries could reduce returns, potentially causing the value of the Fund’s shares to decrease.
Passively managed funds invest by sampling the Index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the Index.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Funds investing in a single sector may be subject to more volatility than funds investing in a diverse group of sectors.
Investing involves risk including the risk of loss of principal.
Growth stocks may underperform stocks in other broad style categories (and the stock market as a whole) over any period of time and may shift in and out of favor with investors generally, sometimes rapidly.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. The information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value