Sectors run from the hot, energy, to the cold, health care

ALL stocks fit into 11 categories, called sectors, as defined by Standard & Poor’s. Classification is a useful but artificial process. When dinosaur fossils were discovered two centuries ago, scientists classified dinosaurs as reptiles. In so doing, they ignored certain characteristics that dinosaurs had in common with birds — three toes, for example.

The way we group things can subtly affect our perception of them.

In the world of investing, the 11 sectors identified by Standard & Poor’s influence investors’ thinking. Professional managers are keenly aware of their “sector weights.” Are they underweight financials? Are they overweight technology?

Here’s a look at some sectors that have been hot or cold lately.

Energy

Over the 12 months through Feb. 28, eight of the 11 sectors were down, and none was up as much as 3 percent — except for energy, which had returned 23.6 percent.

Investors face a stark choice. Should they pile into energy on the strength of the past year’s results or flee it in light of its recent weakness?

In 2014, before the oil and gas industry entered a terrible slide, there were about 1,900 active rigs. Today, there are about 750, according to Baker Hughes.

In my book, fewer rigs means higher oil and gas prices. My conclusion is that for the next few years, the price of oil will be above $80 most of the time.

The energy stocks with the highest weights in the S&P 500 are Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) and Conocophillips (COP).

Technology

Information technology stocks were the leaders of the U.S. stock market in the five years 2017-2021. They took an awful tumble in 2022.

Rising interest rates have a harsh effect on the market’s more expensive stocks — those selling for a high multiple of recent earnings.

The tech sector has bounced back to life this year. In February it was the only sector with a gain — although to be sure it was a small gain, 0.4 percent.

Rising interest rates are still a threat. But I think many tech stocks are buys now and will be screaming buys if they decline further.

The technology stocks with the highest weights in the S&P 500 are Apple Inc. (AAPL), Microsoft Corp. (MSFT), and Amazon.com Inc. (AMZN).

Communication

The best-performing sector in the three months through February was communication services, up 4.1 percent. But it was the worst performer in the 12-month period, down 21.1 percent.

I wrote a column in October arguing that this sector had been treated too harshly in 2022. Perhaps in this case my timing was good. The communication services stocks most heavily weighted in the S&P 500 are Alphabet Inc. (GOOGL), Walt Disney Co. (DIS) and Comcast Corp. (CMCSA).

Health care

The booby prize for the worst threemonth performance goes to the health care sector, down 8.2 percent from December through February.

The recent weakness in health care stocks might mean that they have lost their traditional defensive character or that there won’t be a U.S. recession in 2023. Then again, it could be the case that the sector got a boost from the COVID-19 pandemic and that this boost is now fading.

The biggest stocks in the S&P’S health care sector are United Health Group Inc. (UNH), Johnson & Johnson (JNJ) and Abbvie Inc. (ABBV).