S&P 500 Sector Correlation

Here’s a bit of a wonky post, and I should give due warning to any math-phobes out there.

The S&P 500 has ten sectors. I took the ten sector indexes for this year and divided each one by the S&P 500. I took the results and calculated the correlation each one has to all the others.

To reiterate, I only used the data for this year, and this is the correlation of the relative strength of the indexes, not the indexes themselves.

Here are the results:

Sector Energy Discr. Staples Finan Health Indust. Tech Materials Telecom Utes
Energy -86.0% -41.5% -64.6% -72.3% 81.5% -40.2% 92.6% 58.8% 18.7%
Discr. -86.0% 12.9% 46.7% 70.4% -84.2% 46.3% -81.1% -58.5% -51.0%
Staples -41.5% 12.9% 10.4% -6.1% -11.3% -13.7% -55.2% 2.5% 69.4%
Finan. -64.6% 46.7% 10.4% 60.2% -68.4% 0.7% -58.0% -57.0% -24.9%
Health -72.3% 70.4% -6.1% 60.2% -83.5% 10.9% -64.7% -72.3% -49.4%
Indust. 81.5% -84.2% -11.3% -68.4% -83.5% -34.9% 81.7% 68.2% 46.0%
Tech -40.2% 46.3% -13.7% 0.7% 10.9% -34.9% -30.7% -25.3% -40.5%
Materials 92.6% -81.1% -55.2% -58.0% -64.7% 81.7% -30.7% 57.1% 2.8%
Telecom 58.8% -58.5% 2.5% -57.0% -72.3% 68.2% -25.3% 57.1% 46.0%
Utes 18.7% -51.0% 69.4% -24.9% -49.4% 46.0% -40.5% 2.8% 46.0%

We see a number of clusters. Notice how the Industrials, Energy and Materials sectors hang together with Telecom nearby. That’s our Cyclical cluster.

Also, Healthcare and Consumer Discretionary are clearly related with Finance as a not-too-distant cousin. These are Defensive stocks. Notice also how the Cyclical sectors and Defensive sectors are negatively correlated with one other. The market leans toward one or the other, but not both.

Consumer Staples and Utility stocks form a third cluster. This is a little surprising. I would have expected Staples and Healthcare to be closer together, but that’s not been the case this year. I’d normally call these Income stocks, but that may not be the best name this year. Within this group, the Staples have a very slight relationship with Defensive stocks while the Utes have a distant correlation with the Cyclicals.

The Tech sector is interesting because it’s an island to itself. Tech isn’t strongly correlated with any sector. Nor is it negatively correlated with anyone. It’s almost as if Tech is an entirely different asset class. Tech does have a passing relationship with Consumer Discretionary, but not with the other Defensive sectors.

There’s some blurring and overlap with these categories so I urge you not to be overly mechanistic with this data. Correlations come and go. I also have some issues with the categories. For example, Visa is considered a tech stock. The Biotechs are under Healthcare but as their name suggests, they’re really both Healthcare and Tech. I’m sure some Biotechs are more correlated with Internet stocks than with J&J. The REITs are included with Finance. Next year, S&P 500 plans to spin REITs out as an eleventh category. That’s a good idea. They behave much more like Utilities than they do large banks. (Did you know Weyerhaeuser is technically a REIT?)

Posted by on October 3rd, 2015 at 10:03 am


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