Stock Market Sectors and the Business Cycle
A stock market sector is a group of different stocks that are in similar industries. There are 11 stock market sectors, from there it breaks down into separate industry groups and subidustries. To keep things simple, we are going to cover the 11 main sectors, according to the Global Industry Classification Standard (GICS). The market is always changing and some sectors might outperform others at times. Below we cover each sector and their top holdings, along with ETFs in that sector. ETFs are a great way to take part in an overall sector that is performing well, and diversify your risk from holding a single company.
The movement of capital from one stock market sector to another is known as sector rotation. It happens when institutions or large money managers sell securities in one industry and then use the profits to make investments in a different industry. The institutions and big money managers will rotate in and out of various sectors to take advantage of changes in economic growth.
Usually, the stock market moves six to nine months ahead of the economy. That indicates that it often changes in anticipation of the direction the economy will take as a whole. As a result, before the event actually happens, markets will anticipate and price in any news that may cause the business cycle to change.
Based on the six stages of the economic cycle, various sectors frequently behave in a different way.
The Business Cycle / Sector Rotation
Stage 1: Economic Contraction
– Because of a decrease in consumer spending, the economy is contracting.
– While corporate sales and profitability are falling, the unemployment rate is growing.
– In light of this, the FED will be encouraged to reduce interest rates, as they did in 2019.
– Generally, we anticipate that tech ($XLK) will climb first, followed by consumer discretionary ($XLY). Stocks from these two industries generally take the market’s bull run by storm.
Stage 2: Trough
– The economy is nearing its bottom.
– As the economy improves, manufacturing, transportation, and industrials ($XLI) will also start to increase.
Stage 3 & 4: Initial Recovery and Expansion
– The economy moves from a trough to a peak.
– As unemployment declines, interest rates, consumer spending, the cost of products and services, corporate sales, and earnings all start to rise.
– When money starts pouring into healthcare ($XLV) and consumer staples ($XLP), that is a sign that the market has peaked. These industries tend to be resilient to recessions since they provide customers with necessities including food, clothing, home items, and personal care products.
Stage 5: Peak
– As the economy hits its peak, growth begins to slow down. Commodity and interest rate increases are starting to have a negative impact on the economy.
– The Federal Reserve will be encouraged to lower interest rates as a result.
– The stock market is already anticipating a recession as it hits its top. Money starts to pour into the financial ($XLF) and utility ($XLU) sectors as a result.
– As the Fed starts to cut interest rates, utilities companies provide institutions and big-money managers a reliable dividend income over the long term.
– When interest rates fall, financials will also profit since borrowing will be less expensive. As a result, financial institutions receive more money from loans and mortgages, which increases lending.
Stage 6: Slowdown
– The economy starts to contract.
– This ultimately results in a market bottom, and the cycle keeps repeating.
– When the markets start their bull run, real estate ($XLRE) will gather momentum before the switch back to high-growth industries starts.
The Different Sectors
Communication Services ($XLC)
Industries of the Communication Services sector:
Advertising Agencies, Broadcasting, Electronic Gaming & Multimedia, Entertainment, Internet Content & Information, Publishing, & Telecom Services.
Top Communication Services Stocks by Market Cap:
$GOOG – $GOOGL: Alphabet Inc. – Internet Content & Information
$META: Meta Platforms, Inc. – Internet Content & Information
$DIS: The Walt Disney Company – Entertainment
$TMUS: T-Mobile US, Inc – Telecom Services
$VZ: Verizon Communications Inc. – Telecom Services
$CMCSA: Comcast Corporation – Entertainment
$T: AT&T Inc. – Telecom Services
$NFLX: Netflix, Inc – Entertainment
$CHTR: Charter Communications, Inc – Entertainment
Communication Services ETF:
$XLC: Communication Services Select Sector SPDR ETF
Consumer Discretionary ($XLY)
Industries of the Consumer Discretionary sector:
Apparel Manufacturing, Apparel Retail, Auto Manufacturing, Auto Parts, Auto & Truck Dealerships, Department Stores, Footwear & Accessories, Furnishings Fixtures & Appliances, Gambling, Home Improvement Retail, Internet Retail, Leisure, Lodging, Luxury Goods, Packaging & Containers, Personal Services, Recreational Services, Residential Construction, Resorts & Casinos, Restaurants, Specialty Retail, Textile Manufacturing, & Travel Services.
Top Consumer Discretionary Stocks by Market Cap:
$AMZN: Amazon.com, Inc. – Internet Retail
$TSLA: Tesla Inc. – Auto Manufacturers
$HD: Home Depot, Inc. – Home Improvement Retail
$BABA: Alibaba Group Holding Limited – Internet Retail
$TM: Toyota Motor Corporation – Auto Manufacturers
$MCD: McDonald’s Corporation – Restaurants
$NKE: NIKE, Inc. – Footwear & Accessories
$LOW: Lowe’s Companies, Inc. – Home Improvement Retail
$SBUX: Starbucks Corporation – Restaurants
$JD: JD.com, Inc – Internet Retail
Consumer Discretionary ETF:
$XLY: Communication Discretionary Select Sector SPDR ETF
Consumer Staples ($XLP)
Industries within the Consumer Staples sector:
Beverages (Brewers, Non-Alcoholic, Wineries & Distilleries), Confectioners, Discount Stores, Education & Training Services, Farm Products, Food Distribution, Grocery Stores, Household & Personal Products, Packaged Foods, & Tobacco
Top Consumer Staples Stocks by Market Cap:
$WMT: Walmart Inc. – Discount Stores
$PG: The Procter & Gamble Company – Household & Personal Products
$KO: The Coca-Cola Company – Beverages – Non Alcoholic
$PEP: PepsiCo, Inc. – Beverages – Non Alcoholic
$COST: Costco Wholesale Corporation – Discount Stores
$PM: Philip Morris International Inc. – Tobacco
Consumer Staples ETF:
$XLP: Consumer Staples Select Sector SPDR ETF
Energy ($XLE)
Industries within the Energy sector:
Oil & Gas, Thermal Coal, & Uranium
Top Energy Stocks by Market Cap:
$XOM: Exxon Mobil Corporation – Oil and Gas Integrated
$CVX: Chevron Corporation – Oil and Gas Integrated
$SHEL: Shell PLC – Oil and Gas Integrated
$PTR: PetroChina Company Limited – Oil and Gas Integrated
$COP: ConocoPhillips – Oil and Gas E&P
Energy ETF:
$XLE: Energy Select Sector SPDR ETF
Financials ($XLF)
Industries within the Financial sector:
Stocks (Funds), ETF(s), Asset Management, Banks, Capital Markets, Close-End Funds, Credit Services, Financial Conglomerates, Financial Data & Stock Exchanges, Insurance Brokers, Insurance General, Mortgage Finance, & Shell Companies.
Top Financial Stocks by Market Cap:
$BRK-A – $BRK-B: Berkshire Hathaway Inc. – Insurance – Diversified
$V: Visa Inc. – Credit Services
$JPM: JPMorgan Chase & Co. – Banks – Diversified
$MA: Mastercard Incorporated – Credit Services
$BAC: Bank of America Corporation – Banks – Diversified
$WFC: Wells Fargo & Company – Banks – Diversified
$MS: Morgan Stanley – Capital Markets
$SCHW: The Charles Schwab Corporations – Capital Markets
Financial ETF:
$XLF: Financial Select Sector SPDR ETF
Healthcare ($XLV)
Industries within the Healthcare sector:
Biotechnology, Diagnostics & Research, Drug Manufacturers (General, Specialty & Generic), Healthcare Plans, Health Information Services, Medical Care Facilities, Medical Devices, Medical Distribution, Medical Instruments & Supplies, & Pharmaceutical Retailers.
Top Healthcare Stocks by Market Cap:
$UNH: UnitedHealth Group Incorporated – Healthcare Plans
$JNJ: Johnson & Johnson – Drug Manufacturers
$LLY: Eli Lilly and Company – Drug Manufacturers
$PFE: Pfizer Inc. – Drug Manufacturers
$ABBV: AbbVie Inc. – Drug Manufacturers
$TMO: Thermo Fisher Scientific Inc. – Diagnostics & Research
$MRK: Merck & Co., Inc – Drug Manufacturers
$DHR: Danaher Corporation – Diagnostics & Research
Healthcare ETF:
$XLV: Healthcare Select Sector SPDR ETF
Industrials ($XLI)
Industries within the Industrials sector:
Aerospace & Defense, Airlines, Airports & Air Services, Building Products & Equipments, Business Equipment & Supplies, Conglomerates, Consulting Services, Electrical Equipment & Parts, Engineering & Construction, Farm & Heavy Construction Machinery, Industrial Distribution, Infrastructure Operations, Integrated Freight & Logistics, Marine Shipping, Metal Fabrication, Pollution & Treatment Controls, Railroads, Rental & Leasing Services, Security & Protection Services, Specialty Business Services, Specialty Industrial Machinery, Staffing & Employment Service, Tools & Accessories, Trucking, & Waste Management.
Top Industrial Stocks by Market Cap:
$UPS: United Parcel Service, Inc. – Integrated Freight & Logistics
$UNP: Union Pacific Corporation – Railroads
$HON: Honeywell International Inc. – Specialty Industrial Machinery
$RTX: Raytheon Technologies Corporation – Aerospace & Defense
$DE: Deere & Company – Farm & Heavy Construction Machinery
$LMT: Lockheed Martin Corporation – Aerospace & Defense
$ADP: Automatic Data Processing, Inc – Staffing & Employment Services
$CAT: Caterpillar Inc. – Farm & Heavy Construction Machinery
$BA: The Boeing Company – Aerospace & Defense
Industrials ETF:
$XLI: Industrials Select Sector SPDR ETF
Information Technology ($XLK)
Industries within the Information Technology sector:
Communication Equipment, Computer Hardware, Consumer Electronics, Electronic Components, Electronics & Computer Distribution, Information Technology Services, Scientific & Technical Instruments, Semiconductor Equipment & Materials, Semiconductors, Software Application & Infrastructure, & Solar.
Top Information Technology Stocks by Market Cap:
$AAPL: Apple Inc. – Consumer Electronics
$MSFT: Microsoft Corporation – Software – Infrastructure
$TSM: Taiwan Semiconductor Mfg. Co. Ltd – Semiconductors
$NVDA: NVIDIA Corporation – Semiconductors
$AVGO: Broadcom Inc. – Semiconductors
$ORCL: Oracle Corporation – Software – Infrastructure
$ASML: ASML Holding – Semiconductor Equipment & Materials
$CSCO: Cisco Systems, Inc – Communication Equipment
$ACN: Accenture PLC – Information Technology Services
$ADBE: Adobe Inc. – Software – Infrastructure
Information Technology ETF:
$XLK: Technology Select Sector SPDR ETF
Materials ($XLB)
Industries within the Materials sector:
Agricultural, Aluminum, Building Materials, Chemicals & Specialty Chemicals, Coking Coal, Copper, Gold, Wood & Lumber, Industrial/Precious Metals & Mining, Paper, Silver, & Steel.
Top Materials Stocks by Market Cap:
$LIN: Linde PLC – Specialty Chemicals
$BHP: BHP Group Limited – Industrial Metals & Mining
$RIO: Rio Tinto Group – Industrial Metals & Mining
$NTR: Nutrien Ltd. – Agricultural Inputs
$SHW: The Sherwin-Williams Company – Specialty Chemicals
Materials ETF:
$XLB: Materials Select Sector SPDR ETF
Real Estate ($XLRE)
Industries within the Real Estate sector:
Development, Diversified, Services, & REIT(s). REIT(s) would include: Diversified, Healthcare Facilities, Hotel & Motel, Industrial, Mortgage, Office, Residential, Retail, & Specialty.
Top Real Estate Stocks by Market Cap:
$AMT: American Tower Corporation – REIT Specialty
$PLD: Prologis, Inc. – REIT Industrial
$CCI: Crown Castle Inc. – REIT Specialty
$PSA: Public Storage – REIT Industrial
$EQIX: Equinix, Inc – REIT Specialty
Real Estate ETF:
$XLRE: Real Estate Select Sector SPDR ETF
Utilities ($XLU)
Industries within the Utilities sector:
Diversified, Independent Power Producers, Regulated Electric, Regulated Gas, Regulated Water, & Renewable.
Top Utilities Stocks by Market Cap:
$NEE: NextEra Energy, Inc. – Regulated Elected
$SO: The Southern Company – Regulated Elected
$DUK: Duke Energy Corporation – Regulated Elected
$D: Dominion Energy, Inc – Diversified
$SRE: Sempra – Diversified
Utilities ETF:
$XLU:Utilities Select Sector SPDR ETF