2022 has witnessed a recalibration across financial markets, as investors have digested the impact of higher interest rates amid elevated inflation. Despite bouts of optimism that the U.S. Federal Reserve would take a more dovish stance, and better-than-expected corporate earnings, Exhibit 1 shows that the vast majority of large-, mid- and small-cap indices declined through the end of October.
However, not all market segments reacted the same way to this year’s news flow. Indeed, Exhibit 2 shows that the 108% YTD spread between Energy (69%) and Communication Services (-39%) is the highest spread between the best- and worst-performing S&P 500® sectors in the first 10 months of any year since 1990. Energy companies benefitted from increasing commodity prices, while some of the largest growth-oriented Communication Services companies came under particular pressure amid interest rate hikes.
Unsurprisingly, perhaps, sector allocations have been unusually important in explaining this year’s relative returns. One way to see this is by examining the S&P 500 Equal Weight Index and the S&P 500. Exhibit 3 shows that the equal-weight index outperformed in the first 10 months of 2022, as it has done in most years since 1970, and that its 4.8% outperformance in 2022 is the highest margin through the end of October in over a decade.
Although outperformance in equal-weight indices has typically been driven by equally weighting within each sector, Exhibit 4 shows that the S&P 500 Equal Weight Index particularly benefitted this year from its lower exposure to Information Technology and Communication Services (which underperformed), and its higher exposure to Energy and Industrials (which outperformed).
2022’s challenging environment has left few places for investors to hide, but the varying impacts of news flow on market segments contributed to record-breaking sector spreads. The impact of different weighting schemes on sector exposures, and the resulting impact on index performance, means that market participants may wish to watch their weighting scheme.The posts on this blog are opinions, not advice. Please read our Disclaimers.