Not all Stock Sectors are Equal

When you see the major stock indexes bouncing up and down, it is easy to assume all or most stocks are following the same trajectory.

The reality is that a rising or falling stock market does not raise or lower all stocks in the same way.

One way to look at how a rising or falling market affects stocks is to sort them by industry sectors.

Stock sectors group like companies so you can follow broad sections of the market without having to follow individual stocks.

This is often a better way to look at market activity than relying on stock indexes that group dissimilar companies by size.

Reporting Stock Sectors

There are a number of ways to report stock sectors, depending on how fine they are sorted. One of the most popular sorts is by Morningstar.com.

Morningstar groups stock into 12 categories.

The sectors are market-cap weighed, which gives more importance to larger companies.

Their chart tracks returns for:

• Five days
• Year-to-date
• One month
• Three month
• One year
• Three year
• Five year

What you see is a very different picture for the various stock sectors. Some are down sharply over the near past, but better when looking back three to five years.

Of course, when you limit all stocks to 12 sectors, you will find some wide variations within each sector.

Other sectors look better in the near past, but show weakness when viewed over longer periods.

The lesson for stock investors is to be thoughtful about what you buy and sell and look at performance as compared to stock sectors as well as total market indexes.

Comparing one stock’s performance to its sector is another way to judge how well or poorly it has been performing. Stocks that consistently underperform their sector are suspect, while a stock outperforming its sector may be a buy candidate.