Daily Capital

Weekly Market Digest: Reshuffling Occurs Within Sector and Industry Classifications

It was an action-packed week. Both the DJIA and the S&P 500 overcame trade war escalation to hit all-time highs, treasury yields spiked, S&P sector reclassification arrived, and the Cleveland Browns finally unlocked their Bud Light victory fridges! Friday’s much anticipated trading session featured both quadruple witching (where index and stock futures and options expire) and the last chance for funds to rebalance before a major sector classification system change, but ultimately proved relatively non-eventful. International stocks, which started the month off on a down note, outperformed for the week.

Weekly Returns

S&P 500: 2,929 (+.85%)
FTSE All-World ex-US (VEU): (+2.63%)
US 10 Year Treasury Yield: 3.064% (+2.68%)
Gold: $1,199 (-.48%)
EUR/USD: $1.18 (+.75%)

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Major Events

  • Monday – The United States announced new import taxes of $200 billion in Chinese goods
  • Tuesday – China retaliated with a $60 billion tariff announcement on U.S. goods
  • Tuesday – Treasury yields spiked in anticipation of Fed rate hikes set for next week, with the U.S. 10-Year breaking above 3%
  • Wednesday – The EU antitrust authorities started a probe into Amazon’s treatment of merchants
  • Thursday – U.S. indices closed at all-time highs breaking the August record
  • Thursday – Comcast Corp. and 21st Century Fox opted for a weekend auction to settle the $35 billion takeover battle that has been going on for almost two years
  • Friday – Trade volume spiked as two major market trading events, quadruple witching and major index rebalancing, collided on the same trading day

Our Take

GICS is a sector and industry classification system maintained by MSCI and Standard & Poor’s. On Monday, September 24, the Telecommunications sector will be replaced with a new sector called the “Communication Services” sector that will consist of a mix of tech, media, and telecom companies – along with some other minor reshuffling within sub-industries as well. The new sector will carry about a 10% weighting in the S&P 500 and the Technology sector weighting will decline.

Some of the largest stocks changing include Facebook and Alphabet, moving from the Information Technology sector to the new Communication Services sector. Netflix, Disney, and 21st Century Fox are moving from the Consumer Discretionary sector to the new sector as well. MSCI’s website states that the rapid evolution in the way people communicate and access content has resulted in the integration between telecommunications, media, and Internet companies, which is reflective in these classification changes.

A key takeaway is that although there is some reshuffling going on within sector and industry classifications, the overall weighting for these stocks within major market indices are not changing and the net result should not cause significant market or stock specific movement, though some companies will see increased buying or selling pressure.

The Personal Capital Dashboard utilizes the Morningstar GECS classification system, which is similar to, but unique from, GICS. It is expected to follow suit with similar adjustments to classifications, but not until later in 2019. For Personal Capital advisor-managed accounts featuring our more diversified sector approach, there will be no immediate changes in allocations.

As the GECS transition plans are finalized, we will ensure a smooth transition at the right time. Technology and the ways information is exchanged have evolved. Mergers and acquisitions have further blurred the lines from traditional telecom and it makes sense for sector classifications to change as well to better reflect what is happening in the real economy. This is a positive for our process. The benefit of using a third-party classification system is it allows us to remain objective and take advantage of differences in sector behavior without emotion. Our portfolios will remain positioned to benefit from rebalancing and sector rotation over time. Our long-term advantage over capitalization weighting comes from mean reversion and cycles in sector performance.

Contact a Financial Advisor

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Lacey Cobb, CFA, CFP®
Lacey Cobb serves as the Director of Advice Solutions at Personal Capital. She has 10 years of financial industry experience, with a background in portfolio management, trading, research, investment analysis, and financial planning. Prior to Personal Capital, she was the Head of Trading and Research at Polaris Greystone Financial Group, where she managed the portfolio management team and served on the investment committee. She started there as a financial planner and helped grow AUM from $250 million to $1.5 billion. Before that, she worked for State Street as a fund accountant. Lacey graduated from the University of California, Davis, and holds both the Chartered Financial Analyst® designation and Certified Financial Planner™ designation.
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