The stock market is a huge market that can turn rags into riches. An ever evolving marketplace giving it’s participants the opportunity and chance to change their lives for the better. It’s risky but rewarding!
Every marketplace has categories. If you visit the grocer, there’s a dedicated section for different products. A section for cheese, a section for meats, a section for nuts, you get the point. The stock market is also divided into sections, called sectors. It’s vital that you learn about sectors and the industries within. This way you can include and encompass a sector rotation strategy within your trading plan. If you’re asking yourself why? The answer is simple! Different sectors perform and react differently depending on a number of factors such as inflation, interest rates, government policy, economic conditions etc. The more you understand, the more prepared you’ll be to allocate your trades accordingly.
There are 11 sectors in the stock market and are listed as:
- Basic Materials
- Industrials
- Communication Services
- Healthcare
- Financial Services
- Energy
- Technology
- Utilities
- Real Estate
- Consumer Staples
- Consumer Discretionary
1. BASIC MATERIALS
This sector includes commodities like gold, silver and copper. Chemicals such as dyes or forestry products such as lumber would fall under the materials umbrella. Any company that’s associated with producing/mining these materials would be categorized as basic materials. The industries within this sector is as follows:
- Chemicals
- Specialty Chemicals
- Building Materials
- Paper & Paper Products
- Lumber & Wood Production
- Aluminum
- Steel
- Agricultural raw materials
- Gold
- Copper
- Silver
- Coking Coal
- Other Precious Metals & Mining
- Other Industrial Metals & Mining
ECONOMIC CONDITIONS
In a weak economy, the demand for basic materials will decrease. As demand decreases, so does price. In a strong economy, the demand for basic materials will increase, and therefore pricing increases.
INFLATION
As inflation increases, people look for cash alternative safe havens. They buy gold which is a basic material hedging against inflation risk.
2. INDUSTRIALS
The Industrials sector include companies that operate in various fields such as manufacturing and construction. It is known as the secondary sector of the economy as part of three-sector theory within the domain of macroeconomics.
One of the biggest reasons China’s economy evolved the way it did was largely due to the manufacturing sector. They were able to produce goods at a far more efficient cost which is why they exponentially grew. The industries included within the industrials sector are:
- Freight & Logistics
- Marine Shipping
- Airports & Air Services
- Airlines
- Tools & Accessories
- Industrial Distribution
- Building Products & Equipment
- Business Equipment & Supplies
- Farm & Heavy Construction Machinery
- Specialty Industrial Machinery
- Metal Fabrication
- Infrastructure Operations
- Railroads
- Electrical Equipment & Parts
- Pollution & Treatment Controls
- Conglomerates
- Security & Protection Services
- Consulting Services
- Rental & Leasing Services
- Staffing & Employment Services
- Engineering & Construction
- Aerospace & Defense
- Specialty Business Services
- Industrial Distribution
- Trucking
- Waste Management
ECONOMIC CONDITIONS
When the economy slows down, people will spend less. As they spend less, demand for products and services within the industrial sector is also hampered.
INTEREST
Low interest rates negatively impact the industrial sector. Industrials perform better in a higher interest rate environment but this is not guaranteed as there would certainly be other factors to take into consideration in a real world scenario.
3. COMMUNICATION SERVICES
Communication Services have advanced light years in the past 2 decades. It wasn’t too long ago that the internet was introduced, and widely adopted. Later, the Iphone revolutionized telecommunications paving the way to new forms of direct advertising.
The industries within the communication services sector are:
- Internet Content & Information
- Entertainment
- Electronic Gaming & Multimedia
- Telecom Services
- Publishing
- Broadcasting
ECONOMIC CONDITIONS
Since this sector is comprised of both luxury and necessity products and services, the impact economic conditions can have would be mixed. For example, if economy is weak, people spend less on entertainment but will continue to spend on internet and cell phones.
INTEREST
The communication services sector may respond positively to falling interest rates.
Courtesy of TD Ameritrade
4. HEALTH CARE
This sector has been considered a defensive play since its always needed regardless of what the economic or global situation is. It includes the following industries:
- Drug Manufacturers
- Biotechnology
- Medical Devices
- Medical Care Facilities
- Healthcare Plans
- Diagnostics & Research
- Health Information Services
- Medical Distribution
- Pharmaceutical Retailers
- Medical Instruments & Supplies
ECONOMIC CONDITIONS
Healthcare is always needed. Be it from hospital care to drug manufacturing, people must pay to obtain the care they require. For that reason, it would be wise to invest into health care when economy prospects look bleak.
Exceptional cases exist such as COVID which we’re currently living through. Be careful in allocating funds within this sector given values of pharmaceutical prices may be higher than norms given the temporary increase in profits resulting from COVID treatments and vaccines.
INTEREST
Rising interest rates can negatively impact the bio-tech industry. How? As rates rise, funding and borrowing expenses increase, and therefore less projects funded.
5. FINANCIAL SERVICES
A sector well known for its high dividend yields as well as some of the oldest institutions in the world. As the name suggests, the industries listed in this category are:
- Insurance
- Reinsurance
- Insurance Brokers
- Banks
- Financial Conglomerates
- Asset Management
- Capital Markets
- Financial Data & Stock Exchanges
- Mortgage Finance
- Credit Services
ECONOMIC CONDITIONS
Financial services is strongly tied to how well the economy is performing. The stronger the economy, the better the performance of these industries.
INTEREST
Higher interest rates positively impact financial institutions. As rates increase, so grow the profits of banks, insurance companies and other financial services
6. ENERGY
The energy sector has been very volatile as of late due to the increased push for clean energy. Over time, it’ll be interesting to see how this sector evolves. the industries in this category are:
- Renewable
- Diversified
- Regulated Gas
- Regulated Water
- Independent Power Producers
- Regulated Electricity
ECONOMIC CONDITIONS
A strong economy has a positive impact on oil prices and oil stocks.
However, rising oil prices may lead to inflation. As inflation creeps up, so do rates.
INTEREST
As interest rates rise, oil prices and stocks will drop.
7. TECHNOLOGY
The technology sector has recently boomed due to the COVID outbreak. People staying home and isolating drove up tech stocks tremendously. This sector includes the likes of Microsoft, Facebook and Amazon. One of the sectors that keeps growing and expanding outpacing other sectors. The industries within this sector are:
- Semiconductors
- Solar
- Computer Hardware
- Software
- Computer Infrastructure
- Communication Equipment
- Consumer Electronics
- Electronics & Computer Distribution
- Information Technology Services
- Scientific & Technical Instruments
ECONOMIC CONDITIONS
Over time, the GDP growth has shifted from industrial heavy to tech heavy. As time progresses, technology is being infused in every part of our lives. The internet of things is becoming more pronounced. The technology sector can be thought of as a leading indicator on how the economy is performing.
INTEREST
Interest rates solely can’t accurately depict the impact on the technology sector. Rising rates may be viewed as good since it’s a sign of a stronger economy however lower rates can further allow these tech companies to borrow at a cheaper rate.
8. UTILITIES
Very similar to healthcare, utilities is yet another defensive sector. Since it encompasses basic needs like water and electricity, people will always pay for these services. You’ll find the industries in this category listed below:
- Renewable
- Diversified
- Regulated Gas
- Regulated Water
- Independent Power Producers
- Regulated Electricity
ECONOMIC CONDITIONS
Even at the worst of times, utilities will be needed and in fact thrive. It would be wise to trade and allocate funds in the utilities sector if you foresee hard economic times ahead
INTEREST
Utilities perform significantly better when interest rates are low. In this environment, they’d be able to improve and expand their infrastructure.
9. REAL ESTATE
Real Estate includes land, properties, and the rights to that land whether it’s above or under ground. Real estate is usually looked at as a longer term type of investment. The industries within this recently added category are:
- Real Estate Development
- Real Estate Services
- Real Estate Investment Trusts (REIT)
- Real Estate Health Care Facilities
- Real Estate Industrial Complexes
- Real Estate Mortgages
ECONOMIC CONDITIONS
Real Estate sector performs better during times of economic strength. The public has more disposable income, and would look at spending/investing into real assets. As with all sectors, there are always exceptions to the general rule. Why? There exists other factors that could simultaneously be impacting this sector.
INTEREST
If you’ve looked into buying properties, you’d know that lower interest rates push consumers to buy bigger, and borrow more. This increases real estate prices.
10. CONSUMER STAPLES
The consumer staples sector would be considered a defensive sector since it includes companies and industries that are labelled as recession proof. Products that are sold in this category are clothing, food or personal consumption items. The industries in this sector include the following:
- Beverages
- Confectioners
- Household & Personal Products
- Packaged Foods
- Farm Products
- Discount Stores
- Grocery Stores
- Education & Training Services
- Food Distribution
- Tobacco
ECONOMIC CONDITIONS
Regardless of economic conditions, this sector is a defensive play. If you were questioning where you can park your funds without it eroding from inflation, and still providing stable growth; This sector would be it.
INFLATION
One of the sectors that can fight off inflation fears would be the consumer staples category. Having a portion of your holdings within this sector in rising inflationary times would be a good idea.
11. CONSUMER DISCRETIONARY
Under the consumer discretionary sector, you’ll find products and services that are generally people can live without. As the name suggests, the more disposable income available to the general public, the more profits the consumer discretionary sector will experience. The industries in this category are:
- Auto Manufacturers
- Auto Parts
- Recreational Vehicles
- Auto & Truck Dealerships
- Retail
- Packaging & Containers
- Apparel Manufacturing
- Residential Construction
- Travel Services
- Footwear & Accessories
- Textile Manufacturing
- Furnishings, Fixtures & Appliances
- Personal Services
- Restaurants
- Department Stores
- Luxury Goods
- Resorts & Casinos
- Leisure
- Lodging
- Gambling
ECONOMIC CONDITIONS
If you expecting the economy to dampen, do yourself a favor and get your investments out of this sector as soon as possible. It would be one of the first sectors to get heavily impacted during an economic downturn.
INFLATION
Inflation decreases your purchasing power, and by doing so will reduce your disposable income. As mentioned, less to spend, the consumer discretionary sector is negatively impacted.
DISCLAIMER: This blog should in no way be confused for financial advice.
This is for information purposes only.
It is not intended to be financial advice, nor should it be taken as such.
Please consult a financial advisor for your specific situation.
