INTRODUCTION

 

 



Background

  • Nowadays, investment becomes a common way for people to finance their extra money. There are plenty ways and fields of investing. 
  • To make it more convenient to formulate investment, MSCI and Standard & Poor’s (S&P) together developed an industry taxonomy containing 11 sectors, 24 industry groups, 68 industries and 157 sub-industries in 1999. (Wikipedia, 2018) 
  • 11 Sectors are: Energy, Consumer Cyclical/Staples, Communication Services, Real Estate, Technology, Industrial, Health Care, Financial Services, Basic Materials, Consumer Defensive/Discretionary, Utilities.

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Current Situation

  • Many people now reduce their risk of investment by investing in different financial products such as stock and bond, or investing in different companies.
  • However, sometimes the two companies you invest may belong to the same sector, which means if this sector performs depressing in some periods, then you are at a large risk even you invest in two different companies. Therefore, sector analysis in investment is vital for prudent investors.

 

 

Previous Studies

The Performance of different Stock Market Sectors Over Time

Nick Mccullum

Study Link
Sector performance and economics cycles: When do sectors have the potential to shine?

Nick Kalivas

Study Link

 

  • Sector Diversification.

  • The best performing sectors since 2007 are: Consumer Discretionary, Consumer Staples, Health Care, Information Technology.

  • The worst performing sector since 2007: Financials, Energy.

  • The most recession-resistant sector since 2007: Consumer Staples. (McCullum, 2017)

 

  • Equity returns are also dependent on where we stand in economics cycle.

  • Most of the sectors perform cyclical over economics cycles.

  • Energy stocks are more likely sensitive to the price of oil.

  • Real Estate stocks are often influenced by both interest rates and rent patterns. (Kalivas, 2018)

Our study

  • Compared to these two studies, our analysis is more specific on sector itself, in other words, more microcosmic.
  • Instead of relating stock performance to external factors, we focus on internal variables of stocks in each sector like risk coefficient and etc. Instead of concluding which sector performs best or worst, we want to classify sectors with similar characteristics.
  • We want to figure out which sectors share similar features in stock market and can be classified as the same type.


Here are some facts:

 

Consumer Discretionary and Technology sectors have been the clear winners in 2018, gaining more than twice as much (11.65% and 10.86%, respectively) as the next closest sector — Energy (5.34%) (Yahoo Finance, 2018)

Richard Henry Suttmeier also illustrated that Technology is clear leader among the 11 S&P 500 Sectors, which has gained 5.8% year-to-date, followed by the Consumer Discretionary Select Sector ETF(XLY) with a gain of 4.4%. (Suttermeier, 2018)

 

Do these two sectors share common features?

-- This may be answered at the end of our study

Snapshots of our datasets