Punch line: using an algorithm to isolate sectors experiencing the greatest local relative-return rally, sequentially folding backwards from today, reveals that the consumer discretionary sector has returned 365% vs.154% for the SPX over the latest “ascendancy” episode lasting ~ 7 years; other sector returns over this period have ranged from 33% for energy to 250% for technology (price-based returns).
The following analysis chronicles the time-wise ascendancy of S&P500 sectors over the last 25 years using a dynamic, path-dependent, fold-back methodology (using a modified low-water mark to avoid “ascendancy-trap” and prod sector rotation; excluding sparsely-trafficked telecom services and utilities).
The algorithm starts at the latest date and surveys all sectors to identify the “ascendant” sector that has experienced (is experiencing) the greatest local relative-return rally maxima (relative to the SPX); it details the magnitude of the rally, from its local start date to its local maxima date, along with returns of all other SPX sectors and change in UST10y yields. It then folds back to the “ascendant” sectors local start date and repeats the procedure based on the magnitude of the then prevalent local relative-return rally sector maxima’s; and so it folds all the way back to 1990. The time-wise “ascendant” sectors are reflected in the chart below (reverse chronology):
By way of an example, consumer discretionary (S5COND) is the latest ascendant sector whose outperformance phase commenced on 11/20/2008 and peaked on 11/12/2015. It achieved a relative excess return of 83.2% vs. the SPX, by returning 364.8% vs. 153.7% for the SPX (price-based returns). Reading across the row displays sector returns for all other sectors and a 101bp fall in UST10y yields. (Please review pdf link below for magnified detail.)
sector ascendancy chronology pdf
A few high-level comments gleaned from the analysis:
- energy experienced the greatest local relative-return rally spanning 7/3/2000 to 7/14/2006, with another, smaller, follow-on leg up in H1, 2007; materials was the next best performing sector during this episode
- consumer discretionary, the latest “ascendant” sector, local relative-return rally has exceeded the Y2K tech-bubble local relative-return rally although it’s taken S5COND ~ 7 years to achieve that distinction (perhaps dubious given the pop that tends to follow inflated bubbles) vs. under 1 year for S5INFT. Further, all sectors are in the green, and several markedly so, during this latest S5COND local rally vs. all sectors, other than S5INFT, being in the red during the Y2K tech episode.
- financials, which was a top “ascendant” sector a couple of times in the 1990’s, displayed classical long-duration behavior then with significantly lower UST10y yields vs. its current pro-rate (risk-premium/growth-based) trading regime
Note: calculations Risk Advisors, data Bloomberg
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