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Markets & Sectors

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Market & Sector Education

Market Sectors are specific segments of the economy comprised of related products, typically within the same industry. Fidelity Research uses The Global Industry Classification Standard (GICS)SM, which is the exclusive industry classification structure used for Standard & Poor's U.S. industry index calculations, developed by Standard & Poor's in collaboration with Morgan Stanley Capital International (MSCI). The GICS is currently made up of 10 Sectors, 24 Industry Groups, 68 Industries, and 154 Sub-Industries (as of August 29, 2008).

How are companies assigned to sectors?

Each company is assigned to a single GICS sub-industry according to the definition of its principal business activity as determined by Standard & Poor's and MSCI. Revenues are a significant factor in defining principal business activity; however, earnings analysis and market perception are also important criteria for classification.

Performance Patterns

On the whole, companies within sectors tend to out-perform and under-perform the market in predictable patterns. Consider this example: when the market rises, consumer discretionary spending tends to rise. It isn't wise to apply this logic at the individual company level, where many internal factors can easily undermine the economy's influence.

The Influence of External Events

Factors that are external to the business cycle can influence the short- or long-term behavior of various industries' stocks. It's important to monitor external factors that may drive the growth of specific sectors. A positive outlook for the general economy certainly helps the broad market, but individual sectors may respond even more favorably depending on other factors. Alternately, external events may have a more negative impact on specific sectors.

By evaluating how these events may affect the relative attractiveness of the different sectors, you might be able to make better informed investment decisions.

Key External Factors

  • Government Policies
    Recent examples of government policies include high-tech antitrust cases such as Microsoft*, the auction of radio frequencies, initiatives to reform healthcare, and the approval or denial of new biotech product proposals.
  • International Trade and Competition
    Increasing globalization of the economy means that foreign activities have more of an affect on American markets. For example, China's move toward acceptance as a member of the World Trade Organization may have a major impact on U.S. exports. Industries that are sensitive to imports or exports would also be affected by changes in currency values.
  • International Exposure
    Keep in mind that certain sector funds may invest in foreign securities. Similar to any mutual fund, a sector fund's exposure to international securities could magnify the overall risk of the fund (e.g., foreign government regulation in the health care sector). While some drug companies have benefited by government deregulation, heavily regulated pricing and government bureaucracy have hampered others.
  • Consumer Demand
    While some aspects of demand are tied to the business cycle, demand can also follow changes in demographics, fashions, price levels, or cultural concerns. Strong holiday sales (or the expectation of them) can send retail stocks up. During the late 1990s, the emergence of the Internet and the demand for access created new markets for Internet service providers and online retailers.
  • Innovation
    The introduction of new products and technologies can change the entire landscape of an industry. Examples include the booming trend toward wireless communication and developments in biotechnology. While great investment opportunities abound, rapid product development can also lead to the obsolescence of established products.

    *These materials, including references to specific companies, are for informational purposes only and should not be construed as recommendations.

Common Sector Rotation Strategies

Sector rotation increases exposure to the best performing sectors and reduces exposure to the worst performing ones. Momentum strategies are designed to react to changes in the overall market outlook and modify sector exposure accordingly. If done properly, the distinct advantage of this strategy versus the buy-and-hold strategy is the ability to capitalize on specific market fluctuations possibly benefiting from industry upswings and avoiding downturns.

  • Top-Down Analysis
    Believing that changes in the broad economy have significant, yet different effects on individual industries determines sector movement. By following economic cycles, an investor chooses specific industries that may have strength in the given or forecasted climate. This typically causes movement from one industry to another sequentially, due to anticipation of the various stages of economic expansion and contraction.
  • Fundamental Analysis
    Evaluating the financial statements of companies within the sector may allow the investor to determine possible company-specific strength. The goal is to rotate between sectors that continue to grow at high, but consistent levels, and at a price-to-earnings discount to their growth.
  • Technical Analysis
    Examining the price changes of other securities and indices is the basis for buying and/or selling. The investor looks for relative strength, which is the comparison of a security's price movement in relation to its competitors, the industry or the overall market. Pinpointing impending rotation can be done using broken trend lines or major moving averages. The key is watching for signals that a trend in relative strength, either upward or downward, is breaking — which necessitates a change in holdings.
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What's Happening Now ?

See Sectors or Sector Weightings to find out the current state of US sectors.
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